The case for considering European commercial real estate
Europe’s most dynamic cities make the Continent a potentially attractive prospect for property investors
Property investments tend to do well when economies are strong, and to falter during an economic downturn. So with the eurozone economy expected to grow at an annual rate of about 1.6% this year and next, and with political uncertainty across the region, what is the appeal of European commercial real estate?
Savvy investors need to look at individual commercial property markets if they want to generate good returns. In addition to Europe’s capital cities, there are other flourishing urban and regional centres such as Frankfurt – which has a thriving financial services industry and is home to the European Central Bank (ECB) – and Biarritz, an important centre for France’s flourishing south-west region, that could offer good investment prospects.
Several of Europe’s most dynamic cities are growing at a significantly faster pace than the countries in which they are located. From 2016 to 2021, Berlin’s GDP growth is forecast to be about 50% higher than Germany’s (excluding its capital city), according to consultancy Oxford Economics. The same disparity is true for other major cities including Amsterdam, Madrid and Milan.
Demand for property in these growth cities is supported by longer-term trends that include urbanisation, investment in better infrastructure and facilities, and supply constraints. The emergence of individual cities as high-tech hubs for big technology companies and dynamic start-ups is proving to be good news for property owners and developers.
A shortage of good quality office space in prime European city locations is also a factor in buoyant office rental and property values. Vacancy rates, a measure of unoccupied rental units, have been declining in recent years, particularly at the premium end of the market, while office rents in European cities have been rising since 2009.
Compare property yields with the yield on government bonds, and you’ll find a marked difference: prime office yields in the eurozone are forecast to be higher than 10-year government bonds in the medium term, according to property consultancy CBRE’s 2017 Europe Real Estate Market Outlook.
Meanwhile, in spite of the growth in online shopping, retailers are prepared to pay a premium to have their brand-enhancing flagship stores located in upmarket areas.
How Brexit may benefit European commercial property
The UK’s decision to exit the European Union may also prove a boon for European property markets. HSBC and UBS are among several global banks that are drawing up plans to relocate jobs from the City of London to European financial centres such as Frankfurt depending on the progress of negotiations – potentially bringing an influx of financial-services workers to these cities.
Key European property markets are also benefiting from the investor perception that they are less risky than the UK market post-Brexit. Germany is seen as an attractive “safe haven” market for risk-averse investors even if that means accepting lower yields. German investment volumes have overtaken UK volumes, although political uncertainty surrounding German federal elections later this year may dampen activity.
Focusing on dynamic city economies
At Schroders, we rely on the expertise of our experienced local teams to identify strong property investments. Within the Schroder European Real Estate Investment Trust, we have built a diverse portfolio of eight property assets for retail and office use in growth cities in France and Germany.
In France, we have investments in Biarritz, Rennes in the northwest, Paris, and the wealthy Parisian suburb of Saint-Cloud (where we have bought in a 9.5%-yielding office asset). In Germany, we have assets in Berlin, Frankfurt, Stuttgart, and Hamburg. All our investments have high occupancy levels and prestige corporate tenants such as French supermarket chain Casino and US credit rating agency Moody’s. Our average lease term is five years. We are actively looking for investments in other European growth cities with strong and diversified economies.
Despite the political uncertainty hanging over Europe, the region’s commercial property markets offer some real gems if you know where to look.
What are the risks?
- Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors might not get back the amount originally invested.
- Companies which invest in a smaller number of assets carry more risk than those spread across a larger number of assets.
- The Company may invest solely in property located in one country or region. This can carry more risk than investments spread over a number of countries or regions.
- The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the assets purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
- The fund holds investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall.
- The dividend yield is an estimate and is not guaranteed.
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