The investment appetite for European real estate was as robust as ever in 2015, and we can expect much of the same in 2016.
Liquidity for real estate, in terms of both debt and equity, is now apparent throughout the European continent, with the exception of only a few countries such as Greece, and this is a positive characteristic of a functional European capital market.
Europeans still dominate their domestic and continental market, comprising 70 percent of transaction volumes. Notably, however, North America comprises almost two-thirds of non-European investor activity.
Many of the reasons why European real estate holds broad investor appeal also explain why international investors are attracted to the region's? value-add real estate. These will continue into 2016, but in short, the latter group is specifically attracted by a strong pipeline of properties that require intensive asset management; occupiers that are gaining confidence and reappraising their real estate needs; and new institutional market entrants underpin investor demand for stabilized real estate assets.
Intensive asset management
Real estate is a capital intensive asset class and the Global Financial Crisis (GFC) resulted in a significant volume of assets that endured a prolonged period of under investment or 'capital neglect' in the region. During the post-GFC years in which Europe was characterized by a dysfunctional capital market, vendors often had to divest of higher quality assets to create liquidity and many assets with a more value-add profile are only now coming to market.
One of the principal sources of such 'capital neglected' assets are disposals by closed ended funds, where real estate funds are coming to the end of their fund lives, and with no additional capital available, now need to liquidate. This applies equally to institutional and privately-funded vehicles.
Another source are disposals by German open ended funds, as the sector continues to consolidate and an estimated €11.7 billion of assets still need to be disposed of by 2017.
The third source are acquisitions from bulk purchasers of loan/asset portfolios. In 2014, investment volumes in such portfolios were in excess of €80 billion, reflecting an increase of over 250 percent on 2013. This investment activity has been sustained in 2015 and will continue beyond, providing a pipeline of value-add assets for years to come.
Economic growth and stability is the key to unlocking occupier confidence and on an all-sector basis, rents in Europe are expected to grow by an average of 2 percent in 2015 and by 3 percent in 2016 and 2017, as occupiers gain confidence and expand their real estate needs. Within the office sector, this is reflected in vacancy rates at just above 9 percent – their lowest levels since 2009. Furthermore, this improved occupier demand is coming into a marketplace that has seen limited development activity for at least the last five years, which will further encourage upward rental pressure.
Europe is enjoying a period of stable, if unspectacular, economic growth, which is in stark contrast to the post-GFC years of economic volatility. There are a number of reasons for this period of economic stability, including lower energy costs and inflation, but a key one underpinning positive projections for the future is the monetary policy of large scale quantitative easing adopted by the European Central Bank at the start of this year.
All in all, there is enough supply to meet the heavy demand for European value-add real estate as the property pipeline remains positive