M&G Real Estate Senior Associate Property Research Alex Lund shares his commercial and residential real estate investment picks for Europe in 2020.
According to the latest M&G Europe Real Estate Market Outlook, the opening of the Grand Paris infrastructure project, opportunities for leasing and finding deals outside of the CBD, and Paris submarkets are all projected to present good value for investors in 2020.
M&G Real Estate Senior Associate Property Research Alex Lund also claims green investors need look no further than Amsterdam, a city that regularly tops the charts for ease of living (taking first place in OECD for work/life balance) which is comprised of 80% of commuters who use some form of green transport. The rental yield appears to be positive, currently at 5% rental growth in unregulated markets.
Lund says Stockholm has the fastest growth population in Europe and with a mature e-commerce market, also presents good value and high rental occupancy rates.
Looking regionally, Lund says the outlook for growth across the Eurozone remains mixed. He claims GDP forecasts for 2019-20 stand at 1.3% pa, albeit with marked differences across the EUs five largest economies.
Lund says Spain continues to represent one of Europe’s strongest performers, underpinned by higher consumer demand and corporate investment. By comparison, political in-fighting and budgetary complications in Italy are expected to restrict potential growth.
The labour market has seen unemployment falling to a ten year low of 7.5% with wage growth trending above inflation at 2.5, the fastest in nearly ten years.
While trade tensions between the US and China continue to curb investor enthusiasm, Lund says the appointment of Christine Lagarde as the President of the European Central Bank has been met with optimism, given her dovish stance on monetary policy and support of greater fiscal stimulus at a national level.
With global trade tensions weighing on Europe’s near-term growth prospects, investor risk aversion across all asset classes has increased. Ten-year government bonds are trading at negative yields in Germany, France and the Netherland as investors seek out safe haven assets.
Lund says the ECB has cut its deposit rate to the lowest level on record (-0.5%) with plans to restart its quantitative easing programme from November 2019.
Residential in Short Supply
In the report, Lund claims the outlook for European residential remains highly attractive as new generations increasingly opt to both live and work in larger towns and cities, putting pressure on supply. The supply of both new and affordable housing is increasing, along with increase in demand for modern apartments close to transport and green spaces.
In Berlin and Lisbon, local governments moved to provide greater rental regulation to cap uplifts where the supply and demand dynamics are acute. Lund claims new build developments are exempt from restrictions to encourage continued investment.
Commercial Sector Commands a Premium
According to Lund, city urbanisation rates are expected to continue growing; rents for industrial stock in the right locations and with the best specifications will see further uplift too. Lund claims supply of new space is broadly 30% below its post-recession peak, while demand for the past two years has been 40% above the long-term average. This mismatch has seen development pick up, though well over 80% of completions in 2017 were driven by pre-let activity, as occupiers committed to upgrading to more efficient facilities.
Lund says comparative value and growth prospects can also be found in the multi-let industrial sector across continental Europe.
In the UK, significant investor interest in this subsector has seen pricing move to a premium over Big Box logistics. Across Europe there remains a healthy 150bps discount on average for urban estates. Reflecting strong demand for inner-urban space, rental levels have outperformed more regional logistics assets, growing 3% per annum for the last three years. Lund says headline rents are commanding a premium of 35%.
Lund argues that as investors increasingly focus on income as the primary component of long-term property returns, markets that balance yield, growth potential and volatility offer greater opportunities to target secure, income generating assets. Even in core Central Business Districts such as Paris, Lund says vacancy rates are exceptionally low, allowing investors to take on measured leasing or capex risk to drive higher risk-adjusted returns.
In the Nordic markets such as Utrecht, Brussels and Luxembourg, Lund says these offers some of the best value with limited downside risk. The lack of new supply in German cities means they currently offer medium to high growth potential. By comparision, German cities with record low vacancies such as Berlin and Munich offer some of the best income growth potential.
Retail Moves into Defensive Mode
According to Lund, performance across high-street retails is in decline, based on the quality of stock as well as tourism flows and local market affluence. However, Lund argues that over the next decade, China is projected to add 65 million households to its burgeoning middle class. Chinese disposable income has grown nearly 250% in ten years. Subsequently, Lund says the positive impact on European tourism and knock on effect for real estate investment in Europe is only just beginning.