Riding The Wave: How Long Will It Last?

European investors have been riding the wave of economic recovery for eight years, but eventually we expect that wave to make landfall. The commercial real estate (CRE) market is cyclical in nature, and the CRE boom that we have seen since the end of the Great Financial Crisis (GFC) is bound to come to an end eventually – but likely with a soft landing, not another crash.

Despite uncertainties following the Brexit vote, the economic and CRE news remains encouraging throughout Europe. The wave is continuing as investors in all the markets surveyed by Situs RERC reported that plenty of cash is still available for investment. They attribute this at least in part to the ECB’s decision to keep interest rates low and continue quantitative easing (QE).

The current issue of the Situs RERC Real Estate Report – European Edition provides insight into the current state of the European economy and CRE, including analyses of the major asset classes and European regions. Situs RERC surveyed experts throughout Europe and culled data from hundreds of CRE valuations to provide data on investment rates and investor sentiment.

To download the full report, please click here.

Taco Brink, Managing Director of Situs RERC, states, “In the UK, the economy and CRE are benefiting from loose economic policies, a weak pound sterling and an influx of foreign investors looking for places to park their money for the long term. These trends are overriding understandable concerns about the short- and long-term effects of Brexit.”

“Germany has a stable political situation, a strong economy, low unemployment, low interest rates and no inflation,” says Wilhelm Hammel, Managing Director of Situs. “This has led to Germany overtaking the UK as the preferred European CRE investment location.”

Other highlights from the report include:

  • Ireland and Spain have had great economic growth in recent years, even though the unemployment rate in Spain remains above 17 percent. Ireland stands to be more affected by Brexit because so much of its economy is linked to the UK, but not all in a negative way, and Spain’s CRE has seen a recent surge of investors pouring money into in Madrid and Barcelona, along with smaller cities such as Malaga and Valencia.
  • The Netherlands is the logistics hub for Europe and highly dependent on foreign investment. It is doing well now, and should continue to as long as Europe as a whole keeps riding the wave.
  • The risk tolerance for Alternatives, Industrial and Multifamily product in the UK remains high despite the Bank of England re-affirming that the UK commercial property market is vulnerable to a repricing.
  • Whilst many pundits claim the market has peaked, or will peak imminently, the majority of respondents in the Situs RERC survey believe that underwriting assumptions in Europe are better today than before the GFC.
  • Underwriting standards of debt capital have remained stricter than underwriting standards of equity capital.
  • The recommendation to sell across Europe remained by far the best investment option during Q3 2017, significantly more than a year ago. Only in Mediterranean countries did investors outweigh buying, over holding or selling properties.
  • LTV ratios in Q3 2017 in the UK and Germany specifically, expanded over the previous quarter.
  • German yields are at unprecedentedly low levels – even in the hotel, student housing and nursing home space – unlike many other destinations in Europe.