Despite heightened levels of geopolitical uncertainty across the globe, investor appetite for European property remains strong.
Sentiment in the UK property market is likely to remain volatile while Brexit is being negotiated. In the Netherlands, Germany and France, a series of elections will clearly have the potential to impact on Eurozone’s fragile economic recovery. Yet it may also create opportunity for agile investors.
According to Knight Frank’s European Commercial Property Outlook 2017, the European investment market lost momentum in 2016 as investment volumes fell at least 20% below an exceptional 2015. Preliminary results suggest that 2016 volumes will be in the range of €190-€200 billion, making it one of the strongest years recorded despite a slowdown in activity in 2016. Knight Frank anticipates that investment activity in 2017 will stabilise at last year’s volumes. The rate of yield compression is also expected to slow, with the potential for yield softening in markets facing increased political uncertainty.
Though return expectations on property are being scaled down, as interest rates remain near zero and inflation low, real estate remains an attractive value proposition. Government bond yields in France, Switzerland, Germany and Denmark are trending negative, and exacerbating the pressure to invest.
Although some investors may perceive the current conditions as risky, political and currency movements may create new opportunities. Rental growth prospects in cities such as Madrid, Dublin, Berlin and Stockholm are compelling, buoyed by improving occupier demand. Geographically, smaller capitals and second tier cities are appearing on the radar as competition intensifies and major markets become ‘fully priced’. Meanwhile, the specialist sectors will provide ongoing opportunities due to their diversity and stable income returns compared to mainstream real estate.