2017 seems to have beaten some of the odds. Property consultants warned of subdued activity given the political uncertainty across Europe and the growing gloom of 2016. However, in Q2 2017* total property investment rose 25% on the previous year. This was largely thanks to the somewhat expected rebound in the UK, which was suffering peak uncertainty in light of the EU referendum. Despite the strong quarter for the UK, however, the country’s unexpected election just before the summer backfired: its ambiguous result did the opposite of boosting investors’ confidence. While there remain plenty of good deals to be had in all markets, things are not looking as promising for the UK, relative to the rest of Europe, as they did a few months ago.
The leadership void in the UK, however, is not deterring investors elsewhere. Germany, the second largest market, has seen volumes rise 15% on Q2 2016 to €13.9 billion in Q2 2017, and a full 49% in H1 2017 relative to H1 2016, to €49 billion. Going forward, the prospect of a new, investor-friendly government in Germany in September, suggests still further growth. The CEE is also performing strongly, having seen the completion of large portfolio transactions and an increasingly established local investment market. Hungary, Czech Republic and Poland are leading the charge. After more than a decade of partnership with Western European democracies and the development of their institutional infrastructure, these countries are finally reaching what the Western EU states wished for them all along – convergence. Less reliance on foreign capital and proportionally greater reliance on domestic capital is finally on the horizon, though the road will still be long and tough given the rise of populism in many markets across the region.
Southern Europe is steady and stable, though not necessarily in the most inviting sense. The institutional and regulatory framework for real estate investment in Italy and Spain, although advanced, is insufficient to offset the drawbacks of the wider fiscal regimes and their failure to deliver the necessary reforms to deal with high structural unemployment and economic and business inefficiencies.
The situation is less rosy in South Eastern Europe. Like their South European counterparts to the west, these countries also suffer from high structural unemployment. On top of this, however, their small size has not supported the establishment of a strong industrial base, making these investment markets entirely dependent on foreign capital flows. Small, fragmented and under-educated real estate markets continue to undermine long term investment in this region. Beyond a handful that are commercially well-aware, there are too many investors in these market that are incorrectly pricing opportunities and taking risks that carry a potential loss beyond that which they are capable of managing. These countries rely almost exclusively on foreign investment to drive activity and a lack of professional competence in these markets, coupled with the naiveté of most investors, is supporting a market built on weak foundations. On the plus side, occupational fundamentals remain in check, as the pain from the recent cycle has not (yet) triggered a wave of new development on behalf of myopic developers and investors.
Opportunities therefore vary for investment across Europe. For those investors that have foresight, awareness of the market and boldness to act, a targeted but diversified strategy – one combining stability with growth and real estate fundamentals with financial and technological optimisation – will most enhance reputation and returns.