Europe

Europe’s diverging market cycles

Europe’s commercial property markets continue to fragment in respect of their recovery prospects and in the nature of investment opportunities for which investors are competing.

The UK, the Netherlands and Germany – which together represented two-thirds of Cushman & Wakefield’s estimated 2015 total €246bn (£199bn) European investment market – exemplify these diverging trends as to how legacy assets continue to work through the system, presenting diverse risks and opportunities.

To be effective, it is important to be both proactive and reactive to market cycles.

In the UK, the commercial property market has rallied since the lows reached in mid-2009, particularly in prime markets in London and the South East, where certain sectors are starting to look fully valued or past their peak.

The best example of where this could lead to opportunity is in the high-end residential sector in London. The volume of office-to-residential conversions, as well ambitious large-scale development schemes, has positioned the sector as a strong candidate for a market correction.

Whatever the catalyst may be – such as a Brexit vote triggering a flight of capital away from the UK and a reallocation to, say, Germany, or a general global market downturn – opportunities could emerge to recapitalise over-extended residential property developers with new debt and/or equity at discounts to fundamental value.

In the Netherlands, the opportunity is different. The market recovery is much less advanced and the dynamics in real estate are unique to the country.

To start with, the loan sales market in the Netherlands, and from the Dutch banks, is set to peak this year. Major loan portfolio sales this year will unlock a significant volume of real estate. Secondary market trades arising from major loan portfolio sales will likely follow, triggering activity at the direct property level.

Nimble players are well-placed to capitalise on this anticipated activity, whether hard assets or loans.

But the property market in the Netherlands is highly fragmented, both in terms of the recovery to date and in the performance outlook in the future. For example, too much office development prior to the global financial crisis has left the Netherlands with a structural over-supply of offices. Consequently, investors need to be selective.

There are selective opportunities in the office sector, strictly reserved to the central business districts of Amsterdam, Rotterdam and The Hague, where the occupier market is improving after a substantial correction in rental levels which looks to be approaching the bottom.

In Germany, the market opportunity is different again. While there have been some large loan portfolio sales, the weight of stock coming to market remains in direct assets.

Residential and retail are particularly dynamic sectors. As many as one million migrants settled in Germany in 2015 alone, which counterbalances a slowly declining and ageing population, and will create incremental consumption.

The net effect will exacerbate an existing undersupply of housing stock, which is dove-tailed with rising retail demand. It is no surprise to see retail assets and portfolios in both prime and secondary segments price keenly, as investors seek to capture future performance stemming from this population trend.

At CR, we believe in the German retail growth story and advised on a significant foray into the market with the Sunrise Portfolio – which includes the Gloria Galerie retail complex in the heart of Berlin – for €360m back in December 2014.

We also believe strongly in offices in second-tier locations, such as Düsseldorf, Hanover and Stuttgart. With the right strategy these often have further upside potential.

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