Invesco has pinpointed the Nordics and Germany as the preferred centres for investing in European real estate, due to the relative resilience of their economies to the eurozone's crisis, and a lack of austerity measures.
Invesco has pinpointed the Nordics and Germany as the preferred centres for investing in European real estate, due to the relative resilience of their economies to the eurozone’s crisis, and a lack of austerity measures.
But the asset manager cautioned the more risk-averse allocator to core Europe should lower its general return expectations as “few core markets are forecast to achieve returns in excess of 7%”.
Invesco’s predilection for regions within Europe broadly follows their GDP expectations.
On the macro front, Invesco predicts 3% to 5% near-term GDP expansion in Germany, Nordics and Poland, before the Nordics start outperforming due to their “fiscally sound condition”.
“Nordic real estate is a clear leader in the short term. Returns in traditional markets of the UK, France, Germany and the Nordics, where rental growth is already established and supply is limited, look attractive in the short term.”
Longer term, it said, look for “robust returns” in Central and Eastern Europe and southern European markets.
“In our base case, the Nordics are forecast to have the strongest economic growth prospects in Western Europe.
“Southern Europe – Spain, Portugal, Italy and Ireland – is expected to lag core Europe of Germany, France, Austria, Switzerland and Benelux, and could fall back into recession.
“Central Europe – Poland, Czech Republic and Slovakia – should deliver robust growth. Real estate performance is expected to follow a similar pattern given the strong correlation between rental growth and economic performance.”
But the asset class cannot remain immune from the eurozone’s debt crisis, Invesco stated, and real estate activity had already slowed more recently.
Activity in the first half rose year on year, but the sharpening of the crisis decelerated the rate of growth, so second quarter volumes were only 2% higher than a year earlier.
Invesco said: “The global EMEA figures mask considerable differences between countries, with activity strongest in the Nordic and German markets where economic and, therefore, occupier fundamentals are perceived to be strongest. Central and Eastern European (CEE) markets have also seen increased investor interest, especially in Poland, where there is a compelling growth story and good liquidity, and in Russia where local investors have become more active.
“In contrast, volumes are down in Southern Europe and the UK as investors react to concerns about growth prospects given austerity programmes and sovereign debt fears.”
Europe’s prime real estate remains a solid income producer, Invesco said, while ‘value-add’ investing remains “attractive for long-term holders”.
As risk aversion reins among investors and less complex, riskier strategies therefore are favoured, approaches that involve repairing blemished buildings and improving contracts will “find little investor competition, and have a place in portfolios. As investors continue to avoid these assets, the period in which these strategies are possible is extended.”
Invesco has downgraded moderately its rental forecasts, especially in office and retail, and says those seeking rental yield should expect recovery in European rents to be “slower but longer”.
Only one quarter of the markets Invesco monitors have recorded rental growth, with the average growth registered only 1%. Strongest were the Nordics, and “reasonable levels of rental growth” in Germany.
Investors in second tier European real estate will have to wait at least 12 months longer than prime investors for rental recovery, “as demand will have to improve substantially and supply will have to fall further.
“Although interest rates are likely to be rising by the time that recovery in secondary real estate becomes established, there should be scope for yield hardening given the very wide spread that currently exists between prime and secondary and also between secondary real estate and the ‘risk-free rate’.”
On a five-year view, Invesco said offices in centres like Geneva, Lyon, Lille, London (City) Marseille, Helsinki and Stockholm (pictured) should do best. For retail look to Stuttgart, Cologne, also Helsinki and Stockholm, as well as selected Eastern Europe. For industrial, focus on Helsinki, Gothenburg, Greater London and Budapest and Prague.