Opportunities abound for experienced investors in Europe’s commercial property market

2019 looks to be another year of troubling headlines about geopolitical turmoil and global trade risks. But, despite a backdrop of Brexit and rising populism, last year saw significant investment into European commercial property.

European destinations dominated cities across the world for the volume of inward property investment, with London at the top and Paris, Amsterdam, Madrid, Berlin and Helsinki in the top 10, according to international real estate consultancy CBRE.

In the UK alone, CK Asset Holdings made the £1 billion (US$1.27 billion) purchase of 5 Broadgate, the headquarters of international bank UBS, and Wing Tai Properties and Manhattan Garments acquired 30 Gresham Street, an office building in the City of London, for £460 million.

While this may seem a surprising contradiction, it is not a shock to those experienced in European real estate investment. Having invested over US$€2.2 billion of equity in western Europe over the last 19 years, at Patron we know that amid the noise, there are significant opportunities. The key is identifying where these opportunities are and how to make the most of them.

On a macroeconomic level, there have been significant improvements in Europe: unemployment has fallen dramatically, consumer wealth has increased, and interest rates remain low. Because of the overhang of the global financial crisis, when commercial property development almost ground to a halt, supply of quality commercial real estate remains constrained, while demand has been steady, resulting in a sharp drop in vacancy rates. This will continue during 2019 and office rents are predicted to increase on average by 3.4 per cent across Western Europe, according to global property consultancy Savills.

Looking further ahead, an additional 2.8 million office-based jobs are expected to be created across the EU over the next five years, particularly in the science and tech sector, according to research by Oxford Economics, which will further increase demand for office space.

While challenges remain in certain markets and overall growth is expected to slow according to the European Commission’s latest figures, from 1.9 per cent in 2018 to 1.3 per cent in 2019, some regions are looking particularly attractive. The key is for investors to be selective. With the latest figure of 0.4 per cent for the first quarter beating expectations, growth could beat the forecast.

Ireland and Spain are expected to grow at 4.1 per cent and 2.2 per cent respectively this year. In the first quarter of this year, Spain grew at 0.7 per cent – a faster rate than forecast.

This is particularly impressive considering how severely both economies were hit by the global financial crisis. Spain’s recovery is especially remarkable, generating 2.5 million jobs since 2014 – a quarter of the jobs created in the Eurozone over the last five years – and there is an opportunity here to capitalise on continuing growth.

Portugal too has strong prospects as it emerges from being a developing market and welcomes wealthy international retirees through its highly attractive tax environment and golden visa programme for overseas buyers of residential property. The country is seeing record year on year house price increases thanks to these factors.

Certain pockets of France are also seeing growth, while the UK corporate sector is interesting and may see further opportunities depending on how Brexit plays out. We also see significant opportunities in Italy, given recent regulatory actions that should prompt banks to start selling their non-performing loans.

Although Germany, Europe’s main economic driver, has recently suffered a slowing economy because of growing US protectionism and slowing car sales, it is likely to benefit from China’s increasing fixed-asset investment.

Looking ahead, while the appetite from international investors for big-ticket commercial investments into London may remain, investment focuses are likely to diversify as increasing liquidity, combined with low interest rates and a supply shortage, drive prime commercial property prices upwards. Yields have compressed to around 3.7 per cent for offices and 5 per cent for industrials and logistics in key European cities and this trend is expected to continue in 2019.

Currently, there is an increasing gap between yields of prime and secondary commercial property markets of close to 2.5 per cent. The challenge for investors is to identify well-priced assets that, with investment, will provide good returns with minimum risk.

At Patron, we are currently projecting an aggregate gross internal rate of return of 18 per cent and a gross equity multiple of 1.6x. Over the last 19 years we have learned that delivering strong returns for our investors across all cycles requires creativity, diligence and local knowledge. With the market changing and investors finding the obvious opportunities no longer so rewarding, a granular approach and an understanding of the diverse commercial markets in Europe that drills down to the local level will be vital in 2019 and beyond.

Keith Breslauer is managing director of Patron Capital