Investment volumes in the European property sector have increased relatively steadily since 2009. The current economic boom is the second-longest ever, and despite some indications of a future cooldown, the drivers of continued allocation of capital to the property sector still seem strong.
The European economy demonstrated good resilience during the year, despite global political and macroeconomic uncertainty. The current economic boom is the second-longest ever, but forward-looking economic forecasts indicate a moderate cooldown. Historically low interest rates have led to a significant inflow of capital in the property market and driven prices up to record levels, especially in large cities. When interest rates are raised, the conditions for financing are affected and capital is usually reallocated from riskier investments in favour of more stable real estate investments with dividend yields and fixed income investments, to a considerable extent. Nevertheless, the drivers of continued allocation of capital to the property sector still seem to be strong.
The Nordic property market
Total transaction volume in 2018 increased by 25.0 percent in Norway and 0.5 percent in Sweden, while decreases were posted of 11.0 percent in Finland and 18.4 percent in Denmark. Activity in the Nordics was lower among international investors, particularly from the us and Asia. Combined with a shortage of properties in the office market, this reduced transaction volume from international investors by 25 percent. The Nordic residential sector showed persistent strong momentum and transaction volume from international investors increased by 66 percent.
Trends creating new opportunities
Urbanisation and digitalisation are expected to continue increasing. Combined with increasing capital allocation to longterm investments in property funds, which invest in real estate in Europe, these trends are creating substantial business opportunities in the property sector. Consequently, investments need to be adjusted to changes in how we live, work, communicate and move - for example, by mixing residential and public spaces, meeting new needs for transport and logistics solutions, communications and commercial development.
From an investment perspective, the interplay between property and infrastructure paves the way to new types of investment opportunities. One example, driven by digitalisation, is the development of smart logistics properties, where the greater market demand is driven by changes in consumer behaviour and growth in online shopping. Another example, rising from urbanisation, is the demand for more niched asset classes, such as investments in parking properties in large cities where access to parking is becoming increasingly limited in pace with rising in-migration.
There are business opportunities for Catella and other firms in all phases of the value creation process in real estate. From analysis, design and planning to financing, acquisition, management and, finally, sale. As the world becomes more turbulent and investors increasingly sophisticated, the demand is rising for value-creating services and individualised solutions to managing all phases.
For firms like Catella, with specialist expertise that extends beyond transaction advisory, capital market-related services can generate better margins and added value. Many large investors, such as property funds, are seeking partnerships with local experts who can support them in several European countries. This is creating demand for precisely the type of qualified advisory services that are based on the deep knowledge of local conditions in each market that is found at Catella.
Transaction volumes in Europe – strong office property market
After an upturn in 2017, the European commercial property market levelled off somewhat in 2018. Transaction volumes declined by 9 percent to EUR 227.3 billion. A number of structural trends impacted how investors chose to distribute capital in the European property market. These included the online shopping trend, which is still affecting retail and demand for logistics properties.
The UK, Germany and France still account for the bulk of total transaction volumes in Europe of EUR 175.2 billion, which reflects the size, transparency and maturity of these markets. The Nordic market showed strong activity and high transaction volumes of EUR 42.2 billion.
Uncertainty surrounding the outcome of Brexit negotiations is generating some caution, particularly among European investors. The tendency has been for certain investment decisions to be postponed until the outcome is known. Although some believe Brexit may lead to fewer investments in the UK in the near term, few have any doubts about the long-term status of the region. The market is expected to maintain its top ranking in 2019 as regards willingness to invest, according to the INREV Investment Intentions survey (2019).
The office property market is still attracting the most capital, with a transaction volume of EUR 112.9 billion last year, followed by retail, residential, industrial and logistics properties.
Investors are increasing their exposure
Investment volumes in the European property sector have increased relatively steadily since 2009. There is keen interest among investors in North America and Asia. Based on the potential for diversification, protection against inflation and good, risk-adjusted returns, the property sector remains an attractive investment alternative in both rising and falling markets. According to the INREV survey, the majority of global investors still consider themselves below target for allocations to the property sector and plan to increase their exposure.
The challenge is finding suitable assets to invest in. This is driving the development of new business models and more niched property products that are needed to meet persistently strong demand and return requirements. The trend has been strengthened by rising prices in the property market and the political instability that has made investors more cautious.