Even though economic expectations are clouding over worldwide, the boom in the European real estate markets has not ended. Interest rates in the Eurozone remain at historic lows. The long-term trends of demographic change and urbanisation means quality real estate in key cities will remain scarce.
Even countries like Spain and Ireland, which were formerly in crisis, are again attracting investment. In Dublin and Madrid, for example, annual returns of between five and seven per cent are expected from multi-family residential properties over the next five years, as stated in our recent INSIGHT report. Investors can avoid the recent capital rate increases with strategies such as moving into niche investments or investing more in build-to-core projects and B cities.
There is, however, increasing uncertainty about how the economy will perform overall, not least because of the growing mood of protectionism and the unforeseeable consequences of Brexit.
Volatile stock markets
The simmering trade war between the China and the United States threatens economic growth and could cause immense economic and political disruption worldwide. Rising tariffs could push up prices, reduce consumer spending and corporate revenues, and threaten jobs, particularly in high export economies. In the US, Chinese imports may become more expensive and inflation may rise sharply as a result.
The risk factors involved in a trade war also include unpredictable effects on exchange rates and capital flows. It could also have dire consequences for the German automotive industry. Higher import duties on cars from the EU would have a massive impact on manufacturers.
Stock market volatility is mirroring global uncertainty. At the end of 2018, Wall Street saw a substantial sell-off. Over the course of the year, the Dow Jones Index lost 5.6 per cent, its worst performance since 2008. Other exchanges showed massive losses as well: the DAX, for example, was down 18.3 per cent on the year, and the Nikkei down 12.1 per cent.
B cities on the rise
Then there is Brexit. “After Brexit, Canadian and US investors will be more inclined to invest in continental Europe than in the United Kingdom,” says José Pellicer, Head of Research at PATRIZIA.
Pellicer advises that investors “should focus more on regional markets with positive real-estate-related fundamentals, and they should ensure they have a partner with local expertise.”
The market conditions are forcing more investors to take more of an interest in Germany’s B cities – such as Augsburg, Jena, Karlsruhe, and Mainz in Germany. These have the advantage of being home to small- and medium-sized export-oriented enterprises (Germany’s famed Mittelstand). About two-thirds of all German office workers work somewhere other than the Top 7 cities.
“Many B locations have attractive development potential” Pellicer agrees to a point. “However, beware of liquidity. Investors needs to be compensated for the extra liquidity risk that may come from investing in such locations.”