Finding good value and opportunities in the strong markets throughout Europe is a tough task.
Uncertainties created by macroeconomic factors, most notably China’s recent slowdown, make it difficult to invest money in property with a high degree of confidence that it is not overpriced.
At Estates Gazette’s third Global Real Estate Debate, in partnership with Bilfinger GVA, at Expo Real in Munich, experts faced the question, “How can Europe stay ahead of the US and Asia?”.
Andy Watson, chief investment officer at 
LaSalle Investment Management; Martyn McCarthy, executive chairman of Valad Europe; Thomas Mueller, managing director and portfolio manager of European real estate at Blackrock and Neil Dovey, international head of investment at Bilfinger GVA, were all tasked with explaining their preferred investment strategies in Europe and where they see the potential pitfalls.
Transparency, strong legal systems and relatively stable politics all helped Europe to bring in investment from around the world. There was strong consensus that this would underpin the region as a focus for investors over the long term. However, a few bumps in the road may impede that outcome.
“Europe needs to stay politically stable to continue attracting capital, and that is a bit of a challenge with the migrant crisis,” said Watson. “Europe faces a huge challenge that has its own political perspective. Germany is taking the lead and that may come at a political cost.”
Despite the tragedy and chaos caused by the migrant crisis, Watson said that Germany’s more open immigration policy was a positive sign for its economy and the country’s investment prospects.
“German cities are a good place to start [when looking for rental growth] because of their strong economies and influx of population,” he said.
Germany was a focus for all of the investors on the panel. McCarthy said that Valad was seeing “lots of opportunities” in the country, in particular its logistics sector.
The country, which competes with the UK as the top European destination for global capital, also has an advantage over the UK: the relative weakness of the euro makes German property cheaper.
“I think it does make Germany more attractive, relatively. We have been talking to Chinese insurers and investors, though, and their biggest worry is actually currency. They like the opportunities in Europe and are looking for a US dollar solution to invest here,” said Mueller, who was bullish about Germany’s property market.
The UK market, despite its strong fundamentals, was broadly seen to be fully priced, although more opportunities could be found in the value-add sector than in core.
“The key is the market’s transparency and the data that is available,” said Dovey. “That is what makes the UK the first port of call for many investors and allows the UK to stay ahead.
“Some markets are quite fully priced. Compare the market now to 2006 or 2007 and for some sectors yields are lower now than they were then. For value add we haven’t seen yield compression to those same levels and there is still some value, and that could be the next wave, with global capital moving up the risk curve as a result.”
Despite the recent turmoil in the Chinese economy, there was a broad consensus that capital would continue to flow from the region even if growth in the country fell substantially.
“I have been to China recently and while there are some issues in some parts of the economy, they need to be put into perspective. What other country is still growing at 6%? What other country has so many people that earn $4,000 (£2,585) a year? There is going to be a huge shift in that workforce’s average income and even if China slows to 4% I don’t think it matters. It’s not going to stop the capital coming,” said McCarthy.
Europe was the logical gateway for the deregulated capital of China, agreed the panel, because it was the market that was the most transparent and easy to understand, London and the UK in particular.
“For Asian investors, Europe is the first dip of a toe into a new pond. Chinese institutional capital has been deregulated and is finding its way to Europe for the first time,” said Mueller.
The range and depth of the capital coming from the Far East, and China in particular, will evolve rapidly, the panel predicted, adding that while many large institutions had made the journey west, more high net worth capital would soon follow.
“I see the second wave of this Asian money coming,” Dovey said. “I don’t think we have seen it fully yet. We are seeing high-net-worths coming into Europe, and in terms of the pricing of large trophy assets, of lot sizes of more than £500m or €500m (£369m), that may have changed for the long term. But I think there will be continued pressure to chase income, not just trophy assets.”
While there was underlying concern of a correction in some European markets, particularly for core real estate, the stature and structure of the property industry in the region meant it would continue to be a focus for investors all over the globe.
What about Ireland?
“It’s not often that a question at one of our Global Real Estate Debates provokes laughter rather than agreement – or polite contradiction – but that is what greeted my suggestion that the country might be ready to compete again with bigger rivals as a serious investment proposition.
Ireland clearly isn’t in the Premier League when it comes to investment opportunities. But Europe itself is. That was clear from the panel.
It is a contrast with only a few years ago when the rise of China and recovery and resilience in the US caused some to ask whether Europe would ever return to strength.
Europe may be back in favour for global investors, but it clearly faces challenges, mainly of a macro-economic nature. Chief among them are the stability of the European Union, its ability to cope with the migrant crisis and Germany’s demographic time bomb.”
Damian Wild, editor, Estates Gazette
China’s real growth rate is the slowest since 2001
We estimate that global GDP growth will slow to around 2.5% this year, taking into account our assessment of China’s actual growth rate. However, the world economy should recover in 2016 as activity in China picks up and output in Brazil and Russia stabilises.
Recently, doubts about the accuracy of China’s official GDP figures have come to the fore. Since 2009 we have published a China Activity Proxy (CAP) to track economic growth in China without relying on official GDP data. We believe this now provides a more reliable estimate of China’s actual growth rate. As a result, it makes sense to put more emphasis on our in-house estimate of GDP growth in China when calculating global growth.
On the basis of the CAP, we estimate that growth in China will average about 4.5% this year, rather than “around 7%” as the official figures will almost certainly report. Because China now accounts for more than 15% of the world economy, this disparity is sufficient to lower our estimate for global growth from 2.9% to just 2.4% this year. With the exception of 2009, this would be the slowest pace of global growth since 2001 and is not far above the 2% rate often associated with a “global recession”.
However, this is unlikely to mark the beginning of a prolonged downturn. The CAP shows that economic activity in China has stabilised since the start of the year, and we think it will rebound in 2016 as policy stimulus feeds through. Although the prospects for many other emerging economies are poor, Brazil and Russia in particular are unlikely to continue contracting sharply. Meanwhile, growth in advanced economies should be fairly steady during 2016 & 2017.
The upshot is that global growth will probably recover next year to around 3%. While this would be weak by recent historical standards, it would not represent the catastrophe that many currently fear.
Michael Pearce, global economist, Capital Economics
Panelists pick top European hotspots
McCarthy: Poland is attractive in the context of Europe. In Germany there are still lots of opportunities. You just have to find them. The UK is pretty well worked, but we do development in the UK and that is where most of our focus would be in the country.
Watson: Madrid looks good on paper for rental growth, even though vacancy rates are still fairly high historically. Paris, with the French political scene potentially changing in 18 months, could catch a wave.
Mueller: We are pretty excited about the Nordics, where there is strong population growth. That’s good for the residential market, in particular in cities such as Copenhagen. Retail in Finland is pretty interesting and less expensive than some of the other Nordic markets, specifically non-discretionary retail spend rather than fancy boutiques.
Dovey: There is still some value in value-add in the UK and its regional cities. I think that’s where the focus will be in the UK. Spain still looks to be a strong market. Rents are 50% off their peak and supply levels are reducing rapidly.
