Despite the ratcheting up of U.S. and E.U. pressure on Russia and threats of further sanctions on the country and the rising number of “significant” Russians, the tussle between Russia and Ukraine shows no signs of abating and could yet end messily. At the end of April, however, and after a relatively mild winter, European fears about the energy supply implications of this nasty niggle in distant eastern Europe have diminished. And the hunt for new, more reliable energy supplies is on, hopefully in time for next winter.
So it’s back to normal worries, like the prospects for European real estate in the medium term and how much longer Europe’s present role as a receptacle for global real estate capital can last.
According to Aviva Investors, annual returns of 7.1 percent can be expected for European real estate markets for the five-year period to 2018. That represents an improvement and is largely attributed to robust demand for assets in core markets and better investor sentiment on peripheral European markets that Aviva Investors says could lead to rising capital values from next year. Ireland is singled out for particular mention, and is one reason why TIREL – Europe’s 2014 Editorial Advisory Board meeting is being held there later this year.
Europe’s real estate occupier and investment markets are showing encouraging signs of resilience, says Aviva Investors’ Darren Sriharan. The economic recovery, though patchy across Europe, is gaining traction, occupier markets are improving, and vacancy rates are falling, helped by low new supply; all good news for rental growth.
It’s not all positive. Euro zone inflation is at a tipping point to deflation, and that would bring its own dangers for the wider economy and real estate markets. The ECB is known to be closely monitoring that situation.
Savills is reporting ongoing polarization between prime and secondary rents in European office markets. The firm’s latest European office market report highlights that the tight supply of prime office space is causing rents to rise or stabilize in the best locations, while secondary rents are decreasing due to higher availability and rising incentives in secondary buildings and locations.
Examples of 2013 rental growth for prime CBD offices include 16.1 percent in Dublin, 7.4 percent in Helsinki and 6.1 percent in Oslo; the highest prime CBD rental growth trends this year, says Savills, will be recorded in London’s West End, Dublin, Manchester and Brussels. By contrast, secondary CBD rents saw a mixed picture, with markets such as Paris, Warsaw and Belgrade experiencing significant (–10 percent to –12 percent) rental discounts last year, while in Brussels, Dublin, Oslo, Stockholm and London rental growth of between 5 percent and 10 percent was recorded.
According to Eri Mitsostergiou, European research director at Savills, “Occupiers in European markets are still looking for high-quality buildings, so the availability in prime locations is much lower than average, pushing rents up. We are now also beginning to see falling supply of prime office stock, which is triggering developer activity for refurbishments and new buildings, setting off a new cycle.”
London continues to see exceptional levels of demand, driven by international investors, predominantly from the Middle East and Asia. According to CBRE, investment into London from the Middle East increased from 7.5 percent of total European investment in 2012 to 17 percent last year. London remains Europe’s leading real estate investment destination, but international investors are now starting to at least think about spreading their capital across the European continent, principally France and Germany but also recovering peripheral Europe and Russia, CBRE says. In Russia, investors like the fact that for the best-quality properties rents are generally denominated in U.S. dollars. With the rouble taking a battering on the foreign exchange markets from events in Ukraine, that’s just as well.
“London is capturing the lion’s share of [Middle Eastern] capital,” says Nick Maclean, managing director at CBRE Middle East, “mainly due to its transparent legal system, stable political and economic environment and above all liquidity — key factors in attracting investment.” Hello, Russia.
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Richard Fleming is editor of The Institutional Real Estate Letter – Europe.
