Select your investor profile:
This content is only for the selected type of investor.
Individual investor?
Renovating Europe
European real estate offers better value than the US or Asia.
Europe was late to the real estate party. But being late isn’t always a bad thing. It means that Europe’s real estate cycle is less advanced, with more growth still ahead compared to the US, and with valuations that are more attractive than those in mainstream Asian markets.
appetite for offices
EU unemployment rate vs office occupancy rate
Source: Eurostat, CBRE. Data covering period 31.12.2017-31.12.2018.
After under-investing in their real estate for close to a decade, several European cities are full of buildings that no longer fit their occupiers' needs.
Renovation, refurbishing and re-purposing can therefore be expected to become a bigger feature of urban planning, giving rise to a number of attractive investment opportunities.
What's more, Europe’s economy is on a sufficiently strong footing for people and businesses to be able to pay for space that better meets their requirements. As unemployment has fallen, office occupancy rates have reached an average 93 per cent (see chart).
In Europe’s most popular markets occupancy is at 95 per cent or even higher. Historically, this is a level where good spaces are scarce and start to attract more than one potential occupier, which creates competition and leads to long-awaited rental growth.
Changing demands
For prospective real estate investors, the first challenge is to identify the changing needs of buildings’ occupants, both commercial and residential.
In Europe’s larger cities, tech companies now occupy more office space than banks, which marks a radical shift from a decade ago1. The consequent growth in co-working means that the amount of space required per employee is falling, while flexibility is becoming increasingly important – not only in terms of how office space but also in the way lease agreements are structured.
fewer homes, more households
EU construction vs single household formation
Source: Eurostat, CBRE. Data covering period 01.01.2009-31.12.2017.
Residential demand, meanwhile, is largely influenced by changes in demographics. Construction has failed to keep pace with the rise in the number of households as more and more people live alone (see chart). Millennials often rent and tend to favour modern apartments in urban centres, which are in short supply. At the same time, an ageing population is fuelling demand for more senior housing. European countries are also seeing an influx of foreign students2, as the continent’s universities increasingly use English as a teaching language3, which has helped boost enrolment from increasingly affluent Asians, not least China’s burgeoning middle class.
In retail and logistics, opportunity comes from the fact that e-commerce in Europe is less developed than in the US or much of Asia.
Across all sectors, there is a growing concern for the environment – improving the efficiency of buildings and reducing their environmental footprint from construction to operation.
The other is “space as a service”. Whether it’s where we work, sleep or relax, we are now seeing demand for additional services, be that networking and socialising facilities in an office, a concierge and a gym in an apartment block, or storage facilities for business travellers in their regular haunts. Providing the right services in the right way can boost rental income.
Active management
We have identified four main routes to the active management of real estate assets.
The first is refurbishment and repositioning – buying an underperforming asset with the aim of transforming it into a strong, core one. That could, for example, involve changing a traditional office into modern creative space that meets a tech occupier’s needs or finding a completely different use for a secondary retail asset.
The second is growing the gross leasable area by adding extra floors or redesigning the layout. In a business hotel, for example, clients may value comfortable beds and modern facilities more than space, making it possible to refurbish to include more rooms while also improving the hotel's desirability or quality.
The third is to increase rent by offering more services within a building, such as concierges, laundry, or organised events. The fourth route, “buy and build”, involves purchasing several small assets and packaging them together into a single portfolio that’s large enough to appeal to major institutional investors.
Location matters
We all have a home bias when it comes to real estate. It is a local business, so the domestic market is the logical first place to start. But, as with any investment, diversification is important. Pan-European investing offers a broader range of opportunities, through varied economic and occupier dynamics.
Spain, for example, is still recovering from the 2008 property bust. Madrid is really changing gears, becoming an international city in the mould of London or Paris. So far, Spanish real estate has only recovered half the distance from peak to trough, so there is a lot of potential. Germany is one of Europe’s strongest economies and has a thriving tech scene, particularly in Berlin. The Nordic countries, meanwhile, stand out for their stable economic growth. They tend to be very deep local markets, with strong demand from local players.
Of course, even amid the uncertainty over Brexit, it is impossible to ignore the UK, which remains a major real estate markets. Brexit will bring – indeed has already brought – volatility, reducing demand from occupiers and investors alike. But we believe London will remain a global city and market turbulence could present interesting investment opportunities, particularly from forced sales by businesses exiting the country or shutting down altogether.
A truly pan-European investment manager can thus have an advantage, particularly when it comes to sourcing attractively-priced off-market deals. By having the flexibility to navigate across sectors and regions, we can tap into the best opportunities on offer at any given point in time.
Real estate investing increasingly demands a much more operationally intensive model – to generate attractive returns it is no longer enough to just buy and hold a property. This is where a value-add, active approach really comes into its own, helping to maximise investor returns throughout the cycle.
Benefits of real estate investing
Diversification
due to low correlation with other major asset classes (see table below)
Attractive income stream
which can be further boosted by active management and re-positioning/re-purposing of buildings
Inflation protection
with rents usually linked to inflation
Diversification benefits
Source: Pictet Alternative Advisors, as at 30.09.2018. Indices used: NCREIF Property Index, MSCI World, MSCI EM, JPMGGBI, Barclays Global Aggregate Corporate TR, FTSE NAREIT All Equity REITS TR.
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.