By Mark Unsworth, Head of EMEA Forecasting, Research & Insight
Capital values 1 in Europe’s top cities have now been increasing for 32 consecutive quarters, just short of the 35 consecutive quarters recorded between the early 1990s recession and the early 2000s dotcom bust. Of course, there are different macroeconomic, political, financial and real estate factors at play which affect the duration of each cycle. The current cycle is likely to have further yet to run, given the healthy economic growth being experienced across Europe coupled with continued loose monetary conditions in the Eurozone. Nonetheless, we are undoubtedly in a mature phase of the cycle with very elevated pricing, relative to historical averages, across European real estate.
A trigger is required to turn a boom into bust, thus as the cycle extends it is natural to focus on the downside risks that could bring about such a change. Currently, concerns over increasing debt (housing, corporate, Chinese banks), central bank policy error (rate normalisation), trade wars (US / China), rising populism (inequality, immigration) and technological change (automation, digital security) all top the list.
As such, investors looking to de-risk remain focused on high-quality assets in the top markets despite concerns that many markets are now fully priced, as highlighted by the Cushman & Wakefield Fair Value Index. This makes finding the right opportunities harder but appetite for core product has remained strong with a focus on assets that offer income growth, scarcity value and defensive positioning in the face of structural/demographic change. The enduring trend for Asian capital to target western investment markets continues, as rapidly-growing populations coupled with increasing wealth and an appetite to invest make mature European real estate markets appear safe in comparison to domestic markets, which are also often fully priced compared to history.
Our latest forecasts, which track 123 markets across three sectors in Europe, identify 37 markets with rental growth 2 above both their 10-year historic average and the European forecast average. Markets such as Berlin offices, Budapest retail and Dublin logistics all have the right demand and supply conditions in place to deliver a sustained period of healthy growth. In addition, in 2018 further yield compression is expected in the Benelux, CEE, German and semi-core 3 markets. Our European Fair Value Index identifies current market opportunities relative to the government bond yield plus risk premiums capturing liquidity, transaction costs and depreciation. The results of the Q1 2018 Fair Value Index will be the subject of the Cushman & Wakefield EMEA Forecasting team’s next blog in early May.
Undoubtedly though, at the current point in the cycle, there are many attractive opportunities, for those seeking to maintain higher returns, outside of prime properties in the office, retail and logistics sectors. Leading the way is development and refurbishment in edge of CBD locations or areas benefitting from infrastructure spending, closely followed by private rented residential, hospitality and student housing. In addition, some investors will look to move up the risk curve over the coming years, focusing on higher-yielding secondary property, emerging locations and taking on greater leasing risk.
Mark joined Cushman & Wakefield from sovereign wealth fund GIC in January 2015. He is responsible for the commercial property forecasting service which produces forecasts for 123 markets across Europe, covering the office, retail and logistics sectors. The forecasts are produced quarterly for annual data-points five years into the future and relate to prime property.
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