Amid all the political wrangling over Brexit in the last few months, you might have missed a report from the European Systemic Risk Board, Europe’s economic watchdog, that commercial and residential property across Europe has been overvalued.
Simultaneously, reports of reduced growth from the eurozone, particularly Germany, indicate that the commercial market might be slowing more generally. With CVAs and empty shops painting an increasingly negative picture of British retail, the outlook for European real estate may not, on the surface, look bright.
While some core markets, such as Hamburg, Frankfurt and Milan, have seen rising values and some yield compression, these prices are likely to have been underpinned by overly optimistic predictions for rental growth combined with initial constrained supply. According to Capital Economics, core property is looking too expensive as there is no liquidity risk priced in and commercial rents have declined during the last quarter.
For investors, this leads to two big questions: are we heading towards another crash and is it time to turn away from Europe and the UK?
Despite the warning signs, a crash is unlikely. We may be entering a slowdown, but, unlike the global financial crisis, this has not led to a tightening of credit. Central banks are instead boosting the credit available, with the ECB’s return to quantitative easing a prime example.
Whether or not there are still opportunities in the UK and Europe is down to your ability to employ both a global and a local perspective. As far as we at Patron are concerned, it is definitely not time to sound the alarm on Europe.
Regardless of the geopolitical question marks hanging over several countries across the Continent, including Brexit and a recession in Germany, Europe remains attractive compared with some of its competitors.
Hong Kong is undergoing its own political turmoil and, as Beijing tightens its grip, more Hong Kong money will look to markets such as London for a reprieve. Meanwhile, investors have been wary of China owing to the US-China trade dispute. Finally, a weaker pound will continue to attract investors to London and other key UK cities, although most now believe this will moderate.
A growing concern for many are the seismic changes in retail. It is true the UK has a higher proportion of retail real estate than most other European countries and it is clear the worrying headlines about retailers are affecting bottom lines. However, as the high street evolves, there will be opportunities for investors with the expertise to reposition these assets. It is vital to take a global perspective and learn from how retail assets have been repositioned in countries ahead of the UK in the cycle.
Concerns about Europe are painted with too broad a brush. It is difficult for investors unfamiliar with the Continent and that invest in a more homogenous market, such as the US, to understand the complex differences between neighbouring countries on the Continent. There is absolutely value to be found in Europe, but a granular approach is needed to analyse the potential of an investment and to secure it at the right price.
Keith Breslauer is managing director of Patron Capital