Is the European integration process in a capricious state? This question has been asked by investors since the UK’s surprising decision to withdraw from the European Union. However, the political situation also remains critical in other EU countries where unemployment is relatively high. The EU is not yet threatening to break apart, but the voice of the people is more unpredictable than in the past – as the election results of the past year have shown.
With the impending Brexit in mind, the Urban Land Institute and PricewaterhouseCoopers surveyed more than 780 market participants during autumn of 2016, on the prospects and most important trends in European real estate markets. “Never before in my career have there been so many political risks in so many places at the same time,” said an expert in the Emerging Trends in Real Estate Europe 2017 study about his concerns over future developments.
Germany has become a safe haven
One factor clearly dominates the outlook for 2017 in the study: Germany is replacing Britain as the preferred target for safe investments, with all three podium places going to major German cities. In addition, the real estate industry favours the Nordic countries and is betting on secondary cities, such as Lisbon or Lyon. With low interest and inflation rates, those surveyed have also lowered their expectations for returns. The tenor of the study is clear: less profit is better than increased risk, because Europe’s real estate cycle is probably too advanced for a risk-on phase. Residential property is considered relatively cheap. After all, it offers long-term, stable returns on investment in a low-interest environment. However, critical voices are increasingly raising fears of a bubble in this sector. Professor Harald Simons, a real estate expert and empirica board member, attracted attention by warning against speculative purchases in the Berlin housing market, amongst other things, in February 2017.
Gold medal Gold Medal for Berlin
However, there are substantial reasons for optimism, which gives the German capital the top spot among all European cities: real estate investments in the greater Berlin area are favourable in comparison to similar metropolitan regions in Europe. Prices have only been picking up since 2013. Economic and population growth go hand in hand, and the start-up scene in the multicultural metropolis is flourishing – helped by low rent levels, which have potential for growth.
“Rents are likely to pick up considerably in the coming years.”
Peter Forster, Head of PATRIZIA Germany
Silver goes to Hamburg
“Investors’ interest also remains high in Hamburg,” says Peter Forster. The port city embodies solid development, and is characterised by globally recognised successes, such as the Elbe Philharmonic Hall. Entire inner-city districts, such as the HafenCity, are being developed step by step. As such, this is no small measure: the Übersee area alone has a project volume of one billion euros. In addition, Hamburg is better than almost any other European city at combining high economic growth with affordable housing – targeting the construction of 10,000 new units per year.
Frankfurt comes in third
Germany's banking metropolis moved up 11 places from the previous year. No surprise, since Frankfurt has the most to gain from Brexit. Some financial groups are likely to move parts of their business from London to the continent, especially as the European Central Bank is located in Frankfurt. There are also sceptics, however, who consider the industry euphoria to be exaggerated. After all, Germany is generally considered to be overbanked, and the commercial banks are mostly shedding jobs: unprofitable branches are being closed down and office jobs eliminated. In addition, the vacancy rate for office space in Frankfurt is near double-digits.
Dublin remains a tax haven for American tech giants
For years, low company tax rates have attracted US internet giants like Google, Facebook and Amazon to Dublin, and little will change about this, despite the dispute between the EU Commission and Apple over tax subsidies worth tens of billions. In any case, Dublin can boast a young and growing population, whose disposable per-capita income is scarcely lower than in Frankfurt. The Brexit consequences for Ireland, an EU member, are twofold: on the one hand, Dublin is likely to attract companies from London; on the other hand, the Irish economy could suffer from a weaker post-Brexit UK economy. Currently, however, growth rates in Ireland are among the highest in Europe.
Munich is practically sold-out
For years, demand has been unabated in Germany’s most expensive metropolitan area, even though the Munich real estate market is showing signs of overheating. The boom could continue regardless, however, given the housing shortfall and an extremely low office vacancy rate. “As a rule, new office buildings are completely rented out before construction even begins,” explains Peter Forster. Prices are rising relentlessly in the housing market, construction land in the urban area is scarce, which drives prices ever higher. According to the advisory committee’s provisional figures, land for housing construction rose by about 31% last year alone.
Copenhagen is home to many technology start-ups
The top Nordic city ranks sixth. Due to its high quality of life, Copenhagen has been popular for decades. During the financial crisis, however, perspectives on investing in the property market deteriorated dramatically, since the Danish capital is heavily dependent on the services sector. Correspondingly, the recovery picked up strongly in the aftermath of the crisis. With negative interest rates, the Danish central bank has been putting the brakes on the upward trend of the national currency since 2012, but steep residential prices have continued to rise. Nevertheless, because of the high influx, apartments are in short supply.
Lisbon is a tourist stronghold
Lisbon suffered more from the financial crisis than Copenhagen: real estate market prices fell from 2008 until 2013. Now, however, the economy is more stable than it was before the crisis. In addition, the Portuguese capital offers a return on investment at least one per cent higher than Spain with core investments. The available per-capita income is only 13,600 euros per year, less than in any other city among the Top 10, but tourism is booming.
Stockholm – expensive, but stable
Sweden’s largest city has a stronger industrial sector than Copenhagen. As property prices have been rising again since 2010, and were already relatively high before the crisis, construction land in Stockholm costs two to three times as much as it does in Copenhagen. Demand is high, since investors regard the ‘Venice of the North’ as a haven of stability, especially since the Swedish state is low in debt – just 41% of GDP.
Few Madrid market speculators
Madrid’s ninth place ranking is due to the expectation that plenty of foreign capital will continue to flow into the Spanish capital. Spanish REITs have also been very active recently. But there is no risk of a bubble forming, because prices are rising due to genuine demand. Speculative interest is low, which is also related to the conservative financing criteria of Spanish banks. In addition, the land makes up less than a fifth of the purchase price, on average, and construction activity is low compared to 2005-2007.
Lyon cheaper than Paris
The home of pharmaceutical giant Sanofi also houses many small and medium-sized businesses. This diversified structure makes 10th placed Lyon attractive. The hopes of the real estate sector rest on the revitalisation of the central business district, which is supported by the local administrations’ master plan. In addition, Lyon offers a yield advantage over Paris of some 100 base points.