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european real estate market outlook

January 2020

European property: a rare source of yield

Why real estate remains a fertile hunting ground for long-term investors in search of attractive yields.

Forget truffles. Today, the really hard thing to find is a positive real yield. In Europe, the real estate market is one of the few potentially fertile hunting grounds.

With most major central banks still pumping out stimulus, we expect property’s investment appeal to remain strong, particularly among institutions with longer-term liabilities, such as pension funds. 

But popularity comes at a price – the greater the weight of capital, the greater the chance of a bubble forming.

Fig. 1 Booming demand
Global direct property asset flows, USD million
Global direct property asset flows

Source: Morningstar. Data covering period 01.01.2007-31.10.2019.

Housing shifts

That is why it is important to understand the structural forces at play in real estate.

For one thing, as a society, we are getting older. Today, one in five people in the European Union is aged 65 or over, up from one in six a decade ago. By 2100, the forecast is that it will be nearly one in three.1

There has been a sharp increase in one person households – in 2015 they surpassed the number of two-person households for the first time since EU records began, according to Eurostat data. Add in the growing problem of affordability , and it becomes clear that for an ever larger number of people, the stereotypical three bedroom, two-storey family home is no longer realistic or desirable.

Demand for housing for the elderly and for smaller homes is on the rise, while houses with communal spaces and other shared services will also become more common. Such trends are already having a profound effect on the dynamics of the real estate market.

When considering investments in residential property, it is also important to understand trends in regulation. Recent legislation passed in Berlin, for example, will freeze rents on around 1.5 million homes over the next five years. Similar measures are being debated in other parts of Europe such as Denmark and the UK.

Fig. 2 Single living
EU-28 one person households, as % of all households
One person households

Source: Our World in Data, United Nations. Data covering period 01.01.2010-31.12.2018.

Prospects for the retail real estate sector aren’t especially clear either as it too is facing structural change.  Bricks and mortar retailers will likely remain under significant pressure over the coming year – primarily in the UK, but increasingly also in other parts of Europe as online shopping continues to gather pace.

Monsoon Accessorize, Clarks, Ann Summers and River Island are just a few of the UK High Street names who have negotiated reduced rents in 2019. In such an environment, investors need to find a very special situation at a very special price to justify an allocation to retail real estate. 

On the flip side, 2020 should see a rise in office rents in a number of countries, driven by high occupancy rates. This is particularly true for gateway cities in Southern Europe.

More broadly, though, at this very late stage in the economic cycle, many regions which look cheap are so for a reason. Lisbon, for example, is often cited as offering better value than other key European cities, but we believe this pricing fairly reflects the liquidity risks. 

The UK is another place that is seen as relatively cheap compared to Continental Europe. But, here too, the lower prices reflect greater risks – in this case uncertainty around Brexit, which persists despite the recent election victory by the Conservatives. We believe that trade negotiations could last over the allotted one year that is targeted by the UK government. That’s not to say that there are no attractive opportunities in the UK – there are many, but you need to pick your entry point very carefully.

Consequently in 2020, we are looking for opportunities on a micro basis – considering the merits of each individual building, rather than taking a macro-based bet on a particular location.