The Eurozone is some distance behind the UK in the real estate cycle, with limited economic growth and a number of structural issues remaining. We are currently in the yield compression phase of the cycle, where income security is sought by a number of institutions. The minimal income received from Government bonds in the Eurozone means we are likely to see strong demand for the bond-like income available on prime real estate on the continent and this firmly underwrites the valuations of the well let, core real estate typically owned by the major European REITs. As experienced in London over recent years, this demand and subsequent yield compression in perceived ‘safe income’ real estate can be further enhanced where there is rental growth, and we are subsequently seeking those companies with assets generating rental growth on the continent.
Most evident of this is German residential in major cities. Despite increasing rental controls, the lack of supply means the open rental market is seeing firm rental growth which is set to be captured by the German residential property companies in which we invest over the next 5 years. We continue to most favour Berlin, where the dynamic economy and style of living is increasingly attracting young workers. Despite political protestations towards a rising real estate market, the German consumer has strong levels of affordability in terms of both renting and owning. Germans have a low average level of home ownership and the healthy affordability combined with access to record low long term financing is likely to see this increase with subsequent residential capital growth.
