Standard Life Investments

Focused Insight

Getting real in Europe

  • Real estate remains an attractive asset class as investors seek income
  • The UK has been a main beneficiary but Europe is becoming increasingly popular
  • European inflows are focused on core countries but volumes are rising in the periphery

The current real estate cycle is proving to be an extended affair, as investors search for yield amid historically low interest rates. As a result, investment volumes are reaching pre-financial crisis levels, with global investors challenging domestic investors in a very competitive market. So far, the UK has been the prime beneficiary given its relatively strong economic recovery. Indeed, the London office market experienced double-digit returns in the last six months alone. However, there are signs that capital value growth is slowing in the UK.

In our view, opportunities are more abundant and more attractively priced in Continental Europe at this point in the cycle. Despite the Greek crisis, a cyclical economic recovery continues, with more countries approaching trend growth and domestic demand drivers strengthening. The region’s real estate markets are starting to feel the benefits of the strengthening economic backdrop, with tenant demand improving across a range of markets. Looking at 27 key European office markets, take-up in 20 of them exceeded the long-term average during Q1 2015. This is yet to feed through to rents, with only very modest rental growth across core European markets in the first half of 2015. However, peripheral markets such as Dublin, Madrid and Barcelona are experiencing a cyclical recovery.

Investors are increasingly recognising European real estate’s improving trends, with investment flows rising 15% in the second quarter compared with the same period last year. The bulk of investment remains focused on core countries such as Germany, France, the Nordics and the Netherlands. However, investment volumes are also rising in the periphery, doubling in Spain and tripling in Portugal.

Total returns from European real estate are recovering as prices increase on the back of increased investor interest. According to the IPD/MSCI Global Property Funds Index, Continental European real estate funds returned 11.5% in Q1 2015. This is a steady improvement on the 4.8% return over the year to Q1 2014 and compares favourably on a global basis, falling just short of the Global Property Funds weighted-average return of 12%.

Overall, we believe global real estate markets remain attractive, with a variety of investment opportunities for those investment managers with the capacity to undertake in-depth research. At Standard Life Investments, our dedicated real estate research team is one of the longest established in Europe. The team carries out extensive analysis of global markets to identify those opportunities that we can utilise in our real estate portfolios. You can read their latest views in our Global Real Estate Update.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.