Despite a sluggish economic recovery, the commercial European real estate market is looking robust after a strong start at the beginning of the year, according to Andrew Hook, manager of the Aviva Investors European Property Fund.
In the second quarter of 2014, investment activity in Europe (excluding the UK) totalled approximately €30.7bn, up 38% from the same period a year earlier.
The greatest year-on-year growth in Q1 2014 was seen in Austria, Portugal and Spain. The strong investment volumes across Europe are predominantly focused on the office sector, which accounted for around 40% of all transactions in Europe (excluding the UK), in the second quarter.
“The strength of competition for prime assets in London, Paris and the top-tier German cities is pushing increased volumes of capital towards smaller and higher-yielding markets including the Benelux countries and a recovering Southern Europe,” Hook added.
Threats
Deflation continues to be the main threat to the European outlook, and the euro zone recovery so far has been weak and heavily dependent on a major export-led expansion in Germany.
The first quarter of 2014 saw GDP in the region increase by just 0.2% year-on-year, however if Germany were excluded then GDP would have actually contracted.
“We are now forecasting GDP growth of 0.7% this year, and a minor pick up in 2015 to 0.9%,” Hook said.
Opportunities
However despite these threats, prime assets could be an opportunity for investors in the uncertain economic climate.
“With the balance of risks now weighed to the downside given the threat of deflation and stagnation within the Euro zone, we suggest investors should still be focusing on prime assets,” according to Hook.
Stronger returns are expected in the near term as a result of robust investor demand for prime real estate exposure. While today’s pricing may be expensive by historical standards, it can be tolerated if interest rates are likely to remain lower for a very long time.
“If the economic recovery was to gain momentum then we would suggest a focus on value-add and opportunistic strategies throughout the Euro zone where fundamentals are compelling, including selective investments in Spain and Italy,” he said.
Generally the senior real estate lending continues to be an attractive strategy. Banks are likely to remain reluctant to increase their exposure to real estate leaving a debt funding gap and creating opportunities, such as development finance, in selective core markets.
