Optimism is returning to the major European real estate markets, even though the pandemic is still not fully under control, according to the latest Real Estate Investment Climate Index compiled by Union Investment.
The Index revealed that Germany, France and the UK all showed a marked recovery in the first half of 2021 and that investment has returned to pre-coronavirus levels, or is even slightly above.
The UK is leading the way, with its national index rising by 4.3 points to 68.7, compared to the survey in the second half of 2019. In Germany (66.7), the national index exceeded its pre-pandemic level by 3.5 points. Only France slightly missed the mark: the national index was 67.6 in the second half of 2019 and currently stands at 67.2 points. The coronavirus crisis that paralysed the markets thus seems to have been overcome on the real estate front.
Real estate investors’ expectations have risen significantly
“Property investors are taking a more optimistic view again, buoyed by rising vaccination rates and the easing of travel and access restrictions. Investment markets are recovering, employment is rising and lettings are increasing. There are many indications that we’re at the beginning of a new property cycle, despite the pandemic not yet being fully behind us,” said Olaf Janssen, head of real estate research at Union Investment.
In particular, the expectations of the 151 institutional property investors surveyed by Union Investment across the three largest European economies have risen significantly. In all three regions, this sub-index is higher than it was before the pandemic. In France, the indicator rose by an impressive 19.1 points in the first half of 2021 and is currently 2 points above the pre-coronavirus level. In the UK (57.2) the indicator rose by 11.8 points and is 10.6 points above the pre-pandemic level, while in Germany (59.6) it increased by 9.5 points – 9 points higher than at the start of the pandemic.
The real estate markets are not immune to the impact of the coronavirus pandemic, however. Around 80% of the investors surveyed by Union Investment expect to see changing demand in European real estate investment markets over the coming 12 months. This means that in particular, the quality of properties and tenants will now be scrutinised much more closely. Some 73% of respondents expect buyers to become more cautious overall.
Demand is strongest for offices and residential property
When asked about their investment focus over the coming 12 months, respondents ranked offices and residential as their two most favoured asset classes. Some 33% of respondents plan to invest primarily in offices, while 26% are aiming to invest in residential property.
The increase in home working since the start of the pandemic has clearly not affected the popularity of office properties in any major way, according to the report, which found that only 13% of respondents intend to switch their focus away from office investments due to the rise in home working, and just 3% are planning to divest office properties. However, 68% of respondents are paying more attention to the location and specification of offices.
In Germany, unlike in France and the UK, residential is the most in-demand asset class rather than offices – 40% of respondents intend to invest in the segment in the coming 12 months. “For many years, residential property was considered the boring element in a portfolio. It’s now one of the most attractive. This is due to security having become much more important in the wake of the pandemic, with residential properties seen as stabilisers in the portfolio. And rightly so. They have a low correlation to cyclical developments in the commercial real estate market, deliver stable cash flows and offer good long-term prospects for value growth,” explained Janssen.
Scarcity always triggers price rises. Consequently, the surveyed investors expect rents to rise fastest for logistics and residential properties over the next 12 months. “The logistics sector is benefiting from the growth of online shopping and from brick-and-mortar retailers expanding their online business. This is driving high demand for warehouse and distribution facilities, in particular for modern logistics properties and parcel distribution centres. The residential property market was only briefly impacted by the pandemic because extensive government assistance schemes prevented unemployment rising rapidly, unlike during other crises,” added Janssen.
Greatest risks for property portfolios
The assessment of risk for individual portfolios differs from country to country. In Germany, 53% of respondents rate the lack of suitable investment properties as the greatest risk to their business. In France, the general decline in rental income is considered the biggest risk (48% of respondents).
Shops and hotels are currently facing specific challenges. Nonetheless, half the respondents rate changes in travel behaviour and the associated challenges for hotels as a relatively low risk, while 15% rate this as a high risk.
Some 41% of respondents consider declining demand for retail space to be a low risk, whereas 23% regard it as a high risk for their portfolio.
