post thumb

EUROPE 2020: EMERGING REAL ESTATE INVESTOR POTENTIAL

As we enter 2020, figures continue to show strong potential for emerging real estate investors in Europe. A recent European survey across 22 countries and involving 905 respondents, over 60% of those surveyed are optimistic about investing in the European Real Estate Market, politics, and rising construction costs notwithstanding.

The average growth in property prices throughout the European Union over the last three years has been a respectable 5%, according to Deloitte Property Index.

Global Debt reached an eye watering $250 trillion in the first six months of 2019, and Global Bond Market negative yield (debt) of $13 trillion. European Bond Yields have in the main have also been on the negative side. Interest rates set to remain low, which means investors continue to put their faith in income return from Real Estate.

Online competition in the real estate market continues with Equity and Debt, keeping constant in many property sectors.

Emerging Real Estate Sectors

The emerging real estate market has seen an upsurge in “alternative property development” over the traditional model of the twentieth century.

The long-term demographic urbanisation trends support a defensive investment strategy, which has led more people to put money into hotels and multiple-family housing projects.

The past few years have shown this emerging market as part of the transformation into a service industry.

Investors recognise that there needs to be a more holistic approach to a real estate sector that supplies the finances, construction, and operational management services of all aspects surrounding housing and recreational facilities.


Risks & Rewards of Long-Term Mixed Asset Investment

Real Estate Developers calculate a risk-to-reward ratio on the value to end-user whose demands. This makes each development uniquely complicated, but investors are willing to fund to reap long-term monthly income gains.

In addition to unit rentals, the incentive to improve services such as transport and technological capabilities with the implementation of greener utilities, including power and water, improve the value of mixed-use assets, which provide a higher real estate value and therefore, higher investment potential.

Recycling for Better Urbanisation

The urbanisation of European cities means that in the 21st Century, more than two thirds of the population live in towns and cities. This massive growth in the urban population has led to the need for better utilisation of renewable energy to facilitate transportation and utilities.

Global challenges facing future generations of urbanisation are driving the commitment and innovation to resolve current problems and formulate better and sustainable utilisation of natural resources. The European Green Capital Award has been conceived to promote and reward these efforts.

Urban dwellers are turning to better urbanisation models where traditional multi-use and multi-family high rise monoliths are making way for greener inner city living. Groups and organisations such as European Green Capital, aim to show the benefits offered to city dwellers who are taking up the challenge of making inner cities greener and therefore more attractive as places to live in sustainable housing complexes.

Greener Living Attracts More Capital Investment

Urban regeneration has a way of blurring the boundaries between traditional and alternative real estate projects has attracted significant liquidity in the real estate market in Europe. This capital investment is not only, on the living or accommodation structures, but also enters into the service industries surrounding multi-purpose buildings. The formation of complimentary assets attracts further liquid capital through multi-company, corporate investment for utilities and transport, social enterprises, and others.

For example, the introduction of electric vehicles, solar or wind driven utilities, and cheaper models for Wi-Fi and internet servers brings a new dimension and adds to the value of the real estate asset. Long term living ideals are met for people wanting to take care of their needs from the cradle to the grave: convenient proximity to public facilities, such as transport, medical, and educational centres, attracts an even broader customer base. For investors, this turns into real, added regular income from rentals and service contracts.

Real Estate Risk Factors

There are three main risk factors when investigating Real Estate Investment:

  • Political
  • Inflation & Interest Rates
  • Construction and Capex Costs

Political Risk

Polls show that 60% of people living in the European Union are concerned about political implications within the region for 2020, which is sharply up on the previous year. Political uncertainty has played a major role in property investment within the region, which has led to a downturn in property prices and a drag on real estate value.

This becomes a double-edged sword, as public housing within the European Union has been in short supply for many years; governments have not fulfilled promises to intervene and construct affordable accommodation.

Rent controls by local authorities as a way of dealing with the affordability has not only kept the rents down but also devalued the property leading to the liquidity problem, thereby deterring further capital investment.

Although interest rates are low, lending is at a minimum due to the high construction costs. The knock-on effect turns what could be a lucrative investment into potential extended loss due to lower rental revenue.

Inflation and Interest Rates

Analysts agree the counter-productive controls continue to influence political risk: A more innovative and far-sighted approach would be to give interest rates a boost and unlock the investment potential.

Central Bank intervention continues to either maintaining or cutting the base rate. In all likelihood, this should boost investment opportunities, although this has not yet had a major effect on the underlying economy in the European Union, and economists fear that there will be a long turn around the process, which will play into 2020.

With short-term interest rates lowered or remaining the same notwithstanding, senior economic advisors, expect that inflation will continue steadily for the forthcoming period. This means that there will not be a significant slowdown in growth for the real estate market. The most significant contributing factor will remain construction costs.

High Construction Costs

The years 2005 to 2008 saw a boom and bust in the real estate residential buildings construction industry. Mortgage rates were low, and there was a negative equity sales pitch on every real estate broker’s lips around the world.

In 2008, the construction industry in Europe reached a peak in the third quarter and then went into nose-dive, to reach its lowest level by the following year. On paper, the figure only showed around a one percentage point drop, which appeared not significant given the international crisis that was unfolding in the banking and economic sectors. So much so, that between 2010 and 2015, output prices and construction costs grew at a moderate 0.3% per quarter.

However, the industry sat up to take notice when the costs had accelerated to roughly 0.6% per quarter in the three years, 2016 to 2019. Although labour costs continued to grow following the 2008 crisis, they were at a slower pace. The biggest influence in the construction cost index was the two-thirds total expense of materials.

During the years 2011 – 2016 and out of all 28 EU countries, only Ireland reported a drop in construction cost index; the remainder countries showed an annual cost increase of 1.5%, which hurried to 2.5% by the end of this period.

Two countries where labour costs contribute a higher percentage to materials prices are the United Kingdom and Ireland, and with Brexit appearing to go forward on time, Britain will no longer fall under the EU.

Best Real Estate Investment Opportunities in a Recession

When times are tough, people tend to have less to spend, and this leads to budget downsizing. The sector that is often hit first is homeowners with large mortgages. The knock-on leads to people seeking family accommodation in what is considered lower income multi-family housing complexes.

The up side of this is that while these new home seekers, might not be in the upper income group, they are seldom from the lower income sector. They are looking for a similar way of life to what they have become accustomed to in as much as they are often upwardly mobile, young families, who have day jobs and a family with extra mural activities.

Real Estate Investors who cater to this income group will know that they are securing a long-term rental income so long as they fulfil their tenants’ essential requirements. This group of renters is seeking greener recreation spaces, good public transport, a secure living environment, and modern utilities, which include internet, power, and water.

While this may appear discriminatory, it should become a defensive mechanism or financial protective shield for Rental Agents and Investors. These apartments offer long -term rentals with tenants who take more care of their apartment complex than the lower income groups who are often migratory in their constant pursuit of employment of residency within a country.

Ten Best Real Estate Investment Cities for 2020

Going into 2020, opportunities in the major cities is cautiously driving Real Estate Investment. The main criterion appears to be cities that offer international market and economic connectivity and liquidity.

A recent survey by Price Waterhouse Coopers Europe has given the centres where international capital has had the most focus.

RANK 2020 2019
1 PARIS LISBON
2 BERLIN BERLIN
3 FRANKFURT DUBLIN
4 LONDON MADRID
5 MADRID FRANKFURT
6 AMSTERDAM AMSTERDAM
7 MUNICH HAMBURG
8 HAMBURG HELSINKI
9 BARCELONA VIENNA
10 LISBON MUNICH

TAKEAWAY

The future continues to look bright for European Real Estate Investment, provided capital is spent on developing a broader mix of rental income in cities where urban growth is still being experienced: for 2020, the German economy is holding on despite politics and security issues.

Portugal remains in the top ten for real estate investment, but Lisbon has dropped from first position in 2019 to number ten for 2020. This could be due to the fiscal emphasis placed on cities where international liquidity has become a priority following the exit of the United Kingdom from the European Union.

The type of accommodation and services offered regardless of location defines investment potential; the bottom line for urban life is not only the location but also standard of living within secure green environments.