European Real Estate Assets Remain Attractive Despite Geopolitical Uncertainties
As a New Year and indeed decade approaches, there is growing consensus that Europe’s real estate market is entering the last stages of the current investment cycle. The US vs. China trade war, Brexit and geopolitical risks in the Middle East have contributed to a slowdown by generating market uncertainty over the last year. Although Europe’s economy may avoid recession, growth is widely expected to remain subdued over the next 12 to 18 months and there are lingering questions about how much further the cycle has to run. Rosanna Woods, UK Managing Director at Drooms, explores the future of the real estate industry in Europe.
Despite the uncertainty, the need to find secure and stable income is still a priority for investors and Europe’s real estate industry does offer substantial potential to achieve this in 2020, even as it moves through the ongoing late cycle. Investors are certainly seeing potential in the logistics sector, for example, which has been expanding for some years now, thanks to increasing urbanisation and the continuing growth of e-commerce driving the need for the provision of first-rate distribution centres.
The offices sector is also growing as central business districts are developed in several major cities across Europe while it is no surprise that German cities are regarded as investment hotspots by global investors, who value the safety afforded by scale, liquidity and growing markets. The same applies to Lisbon because of its attractive development and investment opportunities. Additionally, increased investment flows are expected to come from Asia, and especially Japan.
But with the wider economy slowing, the reality is that although global investors remain positive about real estate, there are familiar concerns surrounding the scarcity of attractive assets. Indeed, most markets are certainly quieter at present than this time last year. Although European real estate remains highly liquid overall, expectations are lower regarding the availability of equity and debt as the industry navigates the late-cycle.
Global investment opportunities and changing attitudes
At present, investors are faced with the challenge of how to effectively deploy capital and keep a sustainable cash-flow because of the increasing demand, and therefore prices, of European core real estate assets, which are perceived as safer in the current environment. Several investors are also adopting a build-to-core strategy as an alternative approach to generate income, while alternative real estate assets and residential properties are also being considered as additional investment options. This demonstrates an industry that is slowly challenging traditional investment norms and looking at real estate more broadly while acknowledging possible risks.
Asset owners will need to adapt their assets or convert them to meet changing demands.
Downturn is likely to be relatively gentle
Although the end of the investment cycle does appear to be approaching, the slowdown is likely to be a gentle one. It is unlikely to be as severe as the one seen in 2008, which was caused by a rare, seismic event. And when the next downturn does occur, markets are likely to make a quick recovery.
Investors are sharpening and improving their investment strategies to prepare for the stuttering growth and end-of-cycle risks, though. They are diversifying the economic drivers to which their portfolio is exposed. For example, investors are now considering investing in the alternatives and residential assets as mentioned above. Investors may also decide to invest in multiple sectors rather than one. This does not mean that their views of the real estate sector have changed; they are simply taking precautions by acknowledging that now is not the time to make huge investments.
The fact that the Eurozone is currently regarded as a safer investment destination by global investors still holds true with some chronic challenges. Pricing and scarcity of attractive assets are still the major challenges for investors. This is only exacerbated by the economic uncertainty and geopolitical events in some European markets, and the ongoing decline in consumer confidence.
Technological trends in the sector
Apart from the end-of-cycle warning signs and the decline in consumer confidence, another factor that investors need to consider is technology, which is driving change across all industrial sectors, not just real estate. Mobile technology has major implications for the retail sector, while the concept of driverless cars has raised the prospect that parking structures may well be converted to office or retail spaces in the future. People’s attitudes on how they occupy space continue to change: the advent of the co-working and co-living concepts are having a dramatic impact on the real estate industry. According to a report by PwC, the shared office space market is now going through a revolution, with co-working offices on the rise and likely to account for 30% of corporate office portfolios by 2030.
The Eurozone’s performance in real estate over the last year has been weaker compared to two years ago because of a decline in yields.
Challenges and opportunities ahead
For many asset managers, rapid technological changes are threatening to make some assets obsolete. Asset owners will need to adapt their assets or convert them to meet changing demands. This is more apparent in the retail sector as the number of physical stores continues to decline. To remain competitive, real estate owners will need to become operational businesses and develop new skills. They will also need to be able to understand and meet different consumer needs and expectations.
Virtual data rooms offer key benefits to the real estate sector
But one technological development that offers major benefits for the real estate sector is the use of virtual data rooms (VDRs). It enables investors to take full advantage of market opportunities by enabling them to respond quickly. This is essential if they are to avoid the risk of missing out on a favourable sale. Just one missing document can sometimes block an entire deal, for example.
With Drooms’ VDRs, all incoming documents are indexed appropriately thanks to its ‘auto-allocation’ feature. Business processes such as mergers and acquisitions, commercial real estate sales and non-performing loans can be conducted securely, efficiently and transparently through Drooms TRANSACTION. Using this tool, authorised personnel can have controlled, online access to confidential data that are stored remotely. Additionally, our latest product Drooms PORTFOLIO facilitates intelligent and secure portfolio management of multiples assets throughout the hold phase, allocating bespoke data rooms to individual assets on a single platform. Its “transaction flag” functionality enables parties with admin rights to search and mark transaction-relevant documents for readiness.
VDRs also offer a solution to coping with the rise of ‘big data’, which represents one of the most significant challenges facing real estate market players. By tapping into big data, investors can enhance their decision-making across supply chains. But failure to do so, i.e. by not adopting the right technology, can lead to a severe loss in their competitiveness.
Yields are still attractive in Europe
The Eurozone’s performance in real estate over the last year has been weaker compared to two years ago because of a decline in yields. Nevertheless, global investors still see Europe as a haven for investment opportunities while expecting major disruption in Asia. The yields may have declined but they are still favourable versus the low-interest rates prevailing elsewhere and, despite the inevitable slowdown, there is still strong demand from investors for the right deals and investment strategies. Investors just need to remember that the right technology will be more indispensable than ever when the inevitable slowdown occurs.