Three success factors for pan-European real estate investment
PATRIZIA’s Alexis Gisselbrecht explains what to watch out for in pan-European real estate investment.
Pan-European investing offers the chance to increase portfolio diversification and to gain access to attractive risk-adjusted return opportunities across various sectors and markets – and not just in large metropolitan areas such as London or Paris. Attractive investment opportunities can be found across many European markets and sub-markets, provided that fund managers have a thorough understanding of the local dynamics and can accurately assess local fundamentals and key return drivers. “We invest throughout Europe in selected countries and cities where we have a local presence and a detailed knowledge of the local market conditions,” says Alexis Gisselbrecht, Senior Fund Manager at PATRIZIA.
1. Focus on growth regions
European regions demonstrate disparate growth dynamics. While some regions fail to remain attractive and see their population decline on the back of poor economic performance, other regions – often large metropolitan areas – witness strong economic development and job creations, while also expanding demographically as part of an ongoing urbanisation process. It is important to identify and focus on Europe’s most dynamic regions, as they provide the most robust background to support real estate investments, mitigating downside risks and offering potential for over-performance. “We focus our investment activities in regions displaying the strongest economic and demographic fundamentals, characterised by sustained economic and population growth, a well-developed transport infrastructure and good access to technology,” Gisselbrecht explains. He adds: “When we invest, we pick out the ‘winners’ in our ranking of locations.”
2. Analysing local real estate markets
Analysis of the various markets and sub-markets is performed via a dual approach, with a macro “top down” approach led by PATRIZIA Research, combined with PATRIZIA’s on-the-ground teams’ granular knowledge of local market conditions – the “bottom-up” element. For instance, how does the company identify investment opportunities providing the most attractive risk-adjusted return profiles in the residential market? In collaboration with PATRIZIA Research, fund managers identify European cities that combine strong demographic dynamics, an identified lack of supply and long-term investor demand for real estate. Local conditions undergo close scrutiny. A key role is played by data analysis of factors like population growth and composition, evolution of purchasing power over time, and local market fundamentals.
A key factor of success to make informed investment decisions is to have a thorough understanding of local market behaviours over the entire real estate cycle, to be aware of potential downside scenarios should the market deteriorate unexpectedly. For example, the record from the past ten to fifteen years will show whether enough market liquidity is available over the entire property cycle, and notably during times of downturn, when real estate investment volumes decrease and certain locations are hit disproportionally hard. Gisselbrecht affirms that “getting comfortable that there is appropriate market liquidity is fundamental prior to making an investment decision.” Again, research plays a key role in this analysis. The results of current analyses are listed in the current “PATRIZIA Insight – European Commercial Property Markets” report.
3. Diversification and returns
For each sector – whether retail, office or residential, and depending on the targeted risk-return profile, attractive opportunities can be found across various markets. Investing in a product on a pan-European basis provides a natural degree of diversification, with exposures to countries characterised by different economic, demographic and political dynamics. While there is a relatively strong correlation between the various European economies overall, each has some specific drivers. Pan-European investments provide exposure to these drivers, while at the same avoiding over-exposure to a single country and its associated idiosyncratic risks, such as political risks. Investing on a pan-European basis also enables managers to compare returns available in each market for a specific strategy, and to focus on the markets presenting the most attractive balance between associated risks and available returns at any point in the cycle.
“To determine the investment strategy for our new value-add fund, PEP V, we have performed a detailed analysis of the fundamentals for each sector in our key target markets. On the back of this, we have identified specific investment strategies which we believe currently offer the most attractive risk-adjusted returns for value-add investments and on which we are focusing our sourcing activities,” explains Gisselbrecht.
So, what kind of annual returns can an investor expect from pan-European investments in the office sector, for example? Total returns available vary in each market, but for core products, they will typically range between 5% and 6%, while value-added and opportunistic strategies will typically target total returns between 15% and 20%. As Gisselbrecht says, “Ultimately, it all depends on the investors’ propensity to risk.”