The drivers of persistently increasing allocation of capital to the property sector are strong and interest in the European property market is particularly intense.
The repo rate is a central monetary policy mechanism used to stimulate consumption and investments. When the rate is low, allocation of capital, including to the property sector, tends to rise. Low costs of financing combined with stable direct yield are making real estate an attractive alternative for investors.
The European economy demonstrated good resilience against global political uncertainty in 2017. The steady economic growth was driven by private consumption, supported by the continued drop in unemployment. In addition to the uncertainty about the outcome of the Brexit negotiations and valuation of the euro, internal market risks included that of changed conditions for financing if interest levels were to rise faster or more steeply than expected.
However, the drivers of continued allocation of capital to the property sector are strong. The Investment Intentions Survey 20181 shows that more than half of global investors plan to increase their exposure to real estate in the next two years and that interest in the European property market is particularly high.
1) Sources: INREV, ANREV and PREA
When the rate of urbanisation increases in a country, the concentration of the population in urban areas rises, which leads to new construction as well as higher rents, higher purchasing prices and higher land prices in these areas. More than half the world’s population lives in cities. Within about 20 years, that proportion is expected to rise above 70 percent.2
Urbanisation is having major impact on the property market, where swiftly rising demand in metropolitan regions is confronting slow growth in supply. There are business opportunities for firms in the sector in all phases of the value-creation process in real estate - from analysis and design and planning to transaction, acquisition, financing, management and, finally, sale.
2) United Nations, Department of Economic and Social Affairs
The funds and investment markets are growing in pace with increasing allocation of capital to long-term savings. The inflow of savings capital is being invested in property funds, for example, which in turn invest in property in Europe. This is generating demand for advisory services in relation to transactions and strategic property management and development.
Allocation of global capital to Europe
Investment volumes in the European property sector have risen relatively stably since 2009 and there is keen interest among investors in North America. Asian investors are also increasingly allocating capital to Europe. The answers to the INREV Investment Intentions Survey 2018 indicate a sustained positive attitude towards the property market, but also show that the challenge lies in finding suitable assets in which to invest.
Many large investors, such as property funds, are seeking partnership with local experts who can support them in multiple European countries. This is creating demand for qualified advisory services with deep knowledge of local conditions in each market.
High transaction volumes
After a downturn in 2016, the European commercial property market once again showed growth in 2017. Transaction volumes rose by 4 percent to approximately EUR 293 billion, the third-highest annual figure ever recorded in industry trend reports from Real Capital Analytics (RCA).
As in previous years, the office market is still attracting the most capital, with a volume of almost EUR 120 billion in the past year. The steepest increase, however, was recorded in the industrial property market, where transaction volumes rose by 36 percent compared to the preceding year, to EUR 42 billion in 2017. Investments in retail properties, however, declined by 16 percent to a level of about EUR 52 billion.
Germany, the UK and France combined generated 58 percent of total property transaction volume in Europe in 2017. Investments rose by 35 percent in Spain, 14 percent in the Netherlands and 52 percent in Finland, primarily due to high activity from cross-border market players. In contrast, transaction volumes dripped by 36 percent in Sweden compared to the year before.
New services are creating added value
The capital inflow to Europe from investors elsewhere in the world is increasing and a large portion of property investments are brokered by transaction advisory service providers. A large number of local and global firms that primarily offer transaction advice only are active in the market. Strong development in the European property market has piqued the interest of global service providers, which has created price pressure on transaction advice as a stand-alone service. There is, however, high demand for other advisory services in both rising and falling market conditions. Demand for various types of services varies from country to country in Europe. Investors are becoming increasingly sophisticated, which is stimulating demand for value-creating services and individualised solutions to manage all stages of a property investment - from analysis and acquisition to development and sale. For firms with specialist expertise in the field, these types of capital marketrelated services can generate higher margins than stand-along transaction advice.