OUTLOOK UK: Rental growth seen spreading to more European markets

In today’s low return environment, real estate investors face the dilemma of opting for safe haven investments with low returns or more profitable but riskier investments in value-add or secondary locations, delegates heard at PropertyEU's Outlook 2016 Investment Briefing on Tuesday.

In this context it is useful to look at the differences between the UK and countries in continental Europe as they are at different stages of the cycle, said Stefan Wundrak, head of European research at TH Real Estate.

The UK is ahead of mainland Europe but the outlook for the Continent is positive, he noted: ‘Things are likely to get better in Europe in 2016. The market is resilient and driven by equity, not debt, there is a great awareness of risk and property does not look expensive compared to other asset classes.’

Yields are at record lows in the shopping centre and office markets, especially in the UK, Germany and France, and the downward pressure is likely to continue, Wundrak told the briefing, which was held at the City offices of TH Real Estate.

Properties are becoming more expensive, while rental growth hardly registers as an EU average, with a few scattered positive signs. But looking ahead to 2016 and beyond, other countries like Spain, Ireland, Sweden and Germany will be leading the way in terms of rental growth, while the UK’s performance will weaken.

‘The relatively muted return expectations point to the fact that we are late in the cycle,’ said Wundrak, ‘but it is not a black and white picture, as other signals point to an early stage of the cycle.’

Factors like low expectations, keen pricing, cheap finance, rents at new highs and high investment volumes all belong to a late-cycle stage, whereas others like the deflationary context and the contrast between prime and non-prime markets belong more in an early-cycle stage.

Reading the cycle
The two sets of factors co-exist in the market today and make the scenario more interesting but harder to decipher. ‘Should I stay or should I go? Investors want to know at what stage we are in the cycle in order to make decisions, but the truth is there is no uniform answer across Europe,’ said Wundrak. It is best to look at individual cities and their dynamics, he noted.

In central London there is a lot of profit-taking, private equity companies are net sellers and asset flipping is back to 2007 levels, but this is not a negative signal, he said: ‘It does not mean investors are calling the market, but simply taking the profits while prices are high.’

There is no need for alarm bells over interest rates either. Europe is set for a divergent monetary policy, with the eurozone expecting another three years of 0% interest rates and the UK braced for the first rate rise, but the Bank of England is likely to take ‘baby steps’ in order not to upset the markets. Wundrak pointed to the example of Japan, ‘which must be studied, because it has had zero rates since the mid-90s but it still had cycles, so it shows that ultra-low bond yields do not abolish cycles.’

View Stefan Wundrak's full presentation in the attachment below

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By Nicol Dynes
Investment briefing correspondent