The European property market delivered strong performance in 2019. With interest rates at historically low levels, investors continued to see good opportunities for attractive, risk-adjusted returns in property investments. The result was a steady inflow of capital to the property market.
Upward trajectory for the housing sector
Growth in investment volumes in the European property sector has been relatively stable since 2009. The positive trend is putting pressure on firms in the industry to create new and interesting investment alternatives.
Interest has shifted among various categories of real estate assets in recent years. While office properties held onto first place as the preferred category of investment for the second year in a row according to the inrev Investment Intentions Survey 2020, the residential category showed a sharp increase and took the lead over both logistics and retail properties in terms of volume. Residential properties are considered a sustainable investment, as urbanisation and migration to metropolitan regions indicate continued strong demand. Residential properties’ share of European transaction volume has increased from 6 percent in 2007 to 19 percent in 2019. Logistics is another interesting property segment in Europe. In recent years, tenants have been demanding higher quality premises that meet new standards related to everything from the layout of entrances to building automation. The trend has created a constant need for new development projects, while high investor demand has resulted in dramatic reductions in yield. The logistics segment has become a tenants’ market where they can, by committing to longer leases, gain access to high-quality premises at lower cost. In parallel, interest in retail properties continued to decline in 2019. The segment was the only one in the inrev survey in which interest decreased during the year. The share of investors that still prefer the sector as an investment fell from 75 to 43 percent. The retail sector’s share of European transaction volumes fell between 2018 and2019 by 11 percent. The growth of e-commerce is a key aspect of the negative trend. If the trend continues, there may be interesting business opportunities in the sector ahead, as upmarket retail properties become more realistically priced.
Germany at the peak of Europe
In terms of region, Germany was the top European investment pick in 2019, as it was in 2018. The uk, France and the Netherlands were also among the most popular regions. Brexit had continued negative impact on investor interest in the uk in 2019 and some planned investments and new construction projects have been postponed. Capital was instead allocated to regions including Germany, France, Spain and the Nordics. However, interest in the uk is expected to recover as the political situation stabilises. In the meantime, many firms are instead working with more traditional asset management in the market, along with developing and adding value to existing property projects.
2019 was also a strong year in terms of the Nordic property market. International property investments in the Nordics have grown relatively steadily since 2014 as the region has been considered undervalued compared to several other parts of Europe. Global players are seeing an opportunity to diversify their investments and are seeking higher yields at an acceptable level of risk, which many believe are to be found in the Nordics. Valuations are not the only thing attracting investors to the Nordics. The transparency and business ethics in the countries and the fact that several Nordic countries are eu member states also make them attractive. Capital is coming mainly from inside Europe, especially Germany and the uk, but interest from China is also growing. Sweden remains investors’ preferred Nordic choice in absolute numbers, but investments in Finland have clearly increased since 2013, with peak volume in 2017. The Danish property market has also made great strides since the financial crisis. It has evolved from a domestic market to one in which half of all investors are international.
Sustainability is a hot topic
ESG – or Environmental, Social, Governance – has become an established issue in the property industry and investors are increasingly imposing tougher demands concerning these aspects. For example, they want companies to have unambiguous key sustainability data, are seeking investment managers that use the international benchmarking tool gresb to evaluate the sustainability programmes of property companies, and they are seeking property developers that invest in carbon-neutral buildings. Investors consider environmental sustainability one of the most pressing issues for the future and are looking for advantageous investment opportunities with high sustainability value.