Continental European Property Market Commentary - June 2014
The eurozone economy should grow steadily by 1-1.5% through 2014-2015, as faster growth in the USA and UK boosts exports and as households’ real disposable income benefit from higher employment, lower inflation and a halt to new government austerity measures.
11 July 2014
The eurozone economy should grow steadily by 1-1.5% through 2014-2015, as faster growth in the USA and UK boosts exports and as households’ real disposable income benefit from higher employment, lower inflation and a halt to new government austerity measures. In addition, the upturn in business confidence should encourage companies to rebuild stocks and raise investment as the threat of a currency break up recedes. While there are concerns about deflation in the eurozone, there is no evidence that purchases are being postponed in anticipation of lower prices.
There are early signs of a recovery in tenant demand for office space, not only in the stronger economies of Austria, Germany and Sweden, but also in Benelux, France and Spain. According to Savills, the volume of office lettings is up and rent free periods are starting to shorten. Furthermore, office development remains subdued because banks are reluctant to fund new schemes and because higher residential prices in many European cities mean that developers prefer to build apartments. We expect Berlin, Hamburg, Munich, Oslo and Stockholm to lead the upturn in office rents this year, followed by Brussels, Paris Central Business District and the other big German cities in 2015-2016.
Retail sales are starting to recover across most of Europe, although much of this growth is online. Internet purchases now accounts for almost a fifth of clothing sales in Germany, compared with 4% in 2010 (source: Regio Plan). As a result, it is difficult to be enthusiastic about retail property, although certain types, such as smaller supermarkets and retail parks which focus on food or bulky goods and where rents are relatively affordable, continue to trade well. We also see growing demand for “flagship” stores over 750 m2 in big city centres from luxury goods retailers and fast fashion chains / consumer brands wishing to complement their online presence.
The rapid growth in international trade which went hand in hand with the transfer of manufacturing to Asia over the past two decades appears to be over. While we still see opportunities in logistics around Europe’s major ports and airports, we expect the main area of growth will be online retail. Accordingly, we favour smaller warehouses close to big cities where supply is restricted.
After a prolonged hibernation, European banks are once again starting to lend internationally. The German pfandbrief banks are currently the most active, but French and US banks are also lending cross border and Deutsche Bank has recently issued a CMBS for a portfolio of Italian properties. While it is dangerous to generalise, we estimate that the margin on a good quality commercial property in northern Europe has fallen to under 1.5% on a 50% LTV, from 2.0% a year ago.
The weight of capital from both domestic and foreign investors means that prime office and retail yields have fallen to 4-5% in most major cities in northern Europe. While this pricing might be justified in a few markets which are seeing rental growth (e.g. Paris retail, Munich office), we believe that better value can be found in good quality offices which have short leases or which are on the edges of the Central Business District, or in smaller supermarkets and retail parks where yields are between 6-7%. We believe that prime office and retail yields in Spain and prime logistics yields in Germany have fallen too far and do not represent good value.
We expect total returns on average investment grade European property to average 7-9% per year between end- 2014 and end-2017. Capital values growth will be front loaded benefitting from yield compression in 2014-15, followed by rental recovery from 2015/2016 onwards.
The main upside risk in the short-term is that the inflow of capital from Asia and the USA could trigger a widespread fall in prime and secondary property yields, which would push annualised total returns over 10% per year for a limited period. The main downside risk is that the sovereign debt crisis could reignite if governments fail to meet targets to cut their budget deficits.
The views and opinions contained herein are those of Schroder Property Investment Management Limited and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisors only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Property Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Any forecasts in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
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 may not be repeated.
Use of IPD data and indices: © and database right Investment Property Databank Limited and its
Licensors 2014. All rights reserved. IPD has no liability to any person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any of the information which may be attributed to it.
Issued by Schroder Property Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1188240 England. PRO00074
Authorised and regulated by the Financial Conduct Authority
For your security, communications may be taped or monitored.
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.