Overseas buyers driving double-digit growth in Europe's residential markets
Demand and investment levels are high across Europe's residential property markets, but the supply shortage is causing investors to rethink their approaches.
Investment in Europe's property markets grew significantly over the past year, due in large part to increased demand and activity from foreign investors. With demand for housing exceeding supply across the region, and property investments offering a stable income profile and opportunities to diversify, investors are continuing to shift their focus from commercial assets towards residential.
Research from Jones Lang LaSalle (JLL) found that European residential investment totaled €43 billion in 2017, an increase of 13 percent over the previous year. While most of this investment originated within Europe or in North America, growth was more pronounced in regions further afield, including China and Hong Kong.
With demand continuing to climb, and the supply of properties becoming ever more restricted in certain markets, investors are becoming more confident with risk and exploring different ways to invest in European property through 2018, helping the markets reach an estimated €47–€49 billion by the end of the year.
Mature markets still lead
Germany is still Europe's leading residential property market, its capital Berlin receiving the most investment of any city at €3.7 billion in the last year. Other established markets such as France, Sweden and the United Kingdom also continue to be popular with foreign buyers, with more than half of UK residential property investment now coming from overseas.
These mature markets account for the majority of investment activity, although the ever-dwindling supply of new income-producing properties is a significant barrier. With many older properties entering buy-to-let markets in cities such as Berlin, Copenhagen and Stockholm, significant expenditure is often needed to bring these ageing buildings up to current standards before they can start generating income, and this can be a further financial barrier.
Emerging markets offer compelling alternatives
While the core markets may offer the greatest gains for those who can afford the investment, peripheral property markets experienced the highest growth in 2017, most notably Spain at 165 percent and Ireland at 200 percent investment growth. With significant supply and demand imbalances also being present in many emerging markets, growth is expected to continue at pace through 2018.
As investment opportunities in these markets tend to be privately-owned individual properties, large-scale acquisitions can be more challenging. This has made emerging markets especially popular with overseas property buyers looking for smaller-scale investments, as well as experienced investors looking to diversify their portfolios across borders.
Cross-border investments on the rise
The growth of secondary and peripheral residential markets is causing investors who formerly specialized in one market to take a wider view. Cross-border volumes rose from one quarter of total investments in 2016 to one third last year, as investors gained confidence in dealing with differing property laws and requirements between territories.
A diversified approach offers the best of both worlds to skilled investors, who can benefit from the secure income stream of mature markets and the explosive growth of emerging markets with strong fundamentals. Demand for geographically diverse portfolios is expected to continue to increase, however the complexities of negotiating transactions in unfamiliar territories makes local expertise or assistance a necessity.
Rethinking investment approaches
The supply shortage is the great challenge facing Europe's residential markets, which the surge in development activity in major cities such as London is aiming to address. Forward purchase arrangements now account for the majority of investments in UK property, as patient investors secure prices at current levels for properties under construction and look forward to the anticipated gains when these enter the market in the next few years.
Domestic and overseas buyers are also increasingly entering into joint venture partnerships with other investors or developers to gain access to more substantial land and property assets that may previously have been out of their reach. Already widespread in the UK and Spain, these partnerships are also expected to increase through 2018 as investors become more experienced in the nuances of Europe's diverse residential markets and seek ever greater returns.