With bad economic news emanating from the Eurozone in the past few weeks, a key question for real estate investors has been whether Europe is the best location for investment or if other markets, such as Asia and the US, might hold more opportunities or be a safer target for capital.
Those investing in property will always have different criteria, whether seeking out yield or higher, opportunistic-like returns, investing in their domestic markets or searching internationally for the best opportunities. International investors - particularly those seeking high returns - have, in the past few years, made significant inroads into European markets. Their desire to profit from the downturn by entering into Europe at a time when other investors lacked confidence has played a major role in the recovery.
However, against a background of the rising spectre of deflation, investor concerns about Europe are somewhat understandable. Second-quarter GDP figures showed that, in some of the Eurozone’s most significant economies, the recovery is more fragile than many wanted to believe: Germany suffered a slight contraction, France is flat-lining and Italy has fallen back into its third recession in six years.
But memories are short. In 2011, in the depths of the euro crisis, it was expected that the euro would collapse on the back of a Greek exit from the Eurozone. During this period, US investors largely abandoned European investment programmes. But after Mario Drahgi’s announcement in mid-2012 that the European Central Bank (ECB) would do whatever it took to save the euro, peripheral sovereign bond markets stabilised, and US capital returned.
Since the dark days of 2011, the European real estate market has recovered strongly in some areas. In the second quarter of 2014, investment activity in Europe, excluding the UK, reached a total of €30.7bn, an increase of 38% compared with the same period in the previous year. Competition for quality assets in prime European cities such as Paris, London, Munich and Frankfurt was, and continues to be, intense. Even areas that were once considered no-go zones for investors have staged a comeback. For example, Dublin has become one of Europe’s hottest markets, with investors attracted by a combination of low prices and Ireland’s improving economy, and Spain has seen the greatest year-on-year growth of real estate investment in the first quarter of this year. The recent economic news from Europe and the latest activities of Russia in Ukraine have led some investors to look away from the Continent to Asia and elsewhere. However, with firm action likely to be taken by the ECB to stimulate economic growth, it would be a mistake to write off Europe.
Drahgi has recently hinted strongly that the ECB will implement quantitative easing (QE) to get the economy moving again. Europe, unlike the US, failed to conduct a significant QE programme in the wake of the financial crisis.
Looking at how effective QE was in the US in boosting growth, this is likely to help macro-economic conditions in the Eurozone, although it will only take effect during the next couple of years or so.
Economies take a relatively long time to change and — listed property stocks aside — real estate investment is fundamentally an illiquid business, so investment decisions shouldn’t be made based on short-term positive and negative news stories. It takes time to identify prospects and deploy capital.
As a result, from a fund investment perspective, when we are looking at a typical investment period of two to four years, we need to think about what the markets we are considering now will look like a few years down the line. In Europe, the signs are positive.
What is more, although overall macro-economic conditions will have some impact, property investment is principally a local story. So basing investment decisions purely on a broad macro-economic basis is not always the best or only way to go because good opportunities could be missed.
This is particularly the case with Europe, where countries with wildly different investment characteristics sit in close proximity to one another, and many opportunities exist for those knowledgeable enough about the local markets, well connected enough to access the best deals, and creative enough to identify opportunities that others may overlook.
In short, the fundamentals for Europe remain positive over the medium to long term, and for those with the knowledge and connections to make it work, the party in Europe is only just beginning.
Keith Breslauer is managing director of Patron Capital, the specialist pan-European opportunistic property investor