Tapping into Europe's property market: Investment chances discussed

CAIRO – 24 March 2018: With “the wind back in Europe’s sail,” as the European Commission President, Jean-Claude Juncker, put it during his State of the Union address in September 2017, diversifying your portfolio into euro-valued real estate is a better idea today than it has been since 2003. The dollar and the British Pound are close to par with the euro, providing foreign-currency-holding-Egyptians, who mostly, according to statistics, keep their money in U.S. Dollars, with more purchasing power in Europe. According to property market researcher and analyst Kathleen Peddicord, U.S. dollar holders today have more purchasing power than they did since the early 2000s.

Trends for 2018 suggest that property investment in Europe is still on the rise. Despite risk and volatility being with us in 2018, as it was in 2017, according to Cushman & Wakefield’s 2017 and 2018 Market Outlook Reports, real estate is a relatively safe investment option in Europe.

As the move against globalisation takes a backseat in 2018, capital flows across the world are increasing. Capital-holders have continued to seek the comfort and relative certainty of real estate due to the unstable macro-environment underpinned by political change, uncertainty, the continuous rise of the alt-right movement and populism, increasing terrorism attacks and the growing concern over the global bond and equities markets. This has led many to seek investment in the European property market. Still, where should one invest in Europe and why should they invest? Egypt Today answers the most important questions you may have when taking the decision to invest in Eurozone property.



But where should one invest?

When it comes to investing, there are several things that one should keep in mind: government policies for home and foreign investors, mortgage rates, loan options, yearly taxes, move of ownership fees, price of property up-keeping and, if one is interested, one should also look at countries that provide investors with residence permits or passports.

Moreover, as Cushman & Wakefield’s “What next for European Property Investment?” implies, one should also be on the lookout for countries where they would be able to partner with local investors. The success of most investors in Europe, according to Cushman & Wakefield, stems from their partnerships with local actors who understand the ins and outs of the market. This allows for the pursuit of mutual gains while simultaneously decreasing risk for both parties.

Still, when it comes to investing your hard-earned money, there are certain countries that are relatively safe, or are likely to appreciate better than others. In this section, we introduce you to the top five property investment markets in Europe.



Germany as a safe haven

Germany has been going steady for a long time, with the property market gaining momentum over the past few years, commented London-based property advisors to Egypt Today. “The biggest winner from Brexit is Germany. I expect property prices to go up in Berlin, the capital of Germany, taking the business from London, the current Eurozone hub.” Moreover, Germany, in general, is seen as a safe haven for capital, as Forbes’ Carla Passino, as well as many other property analysts, points out.

There seems to be international consensus regarding Berlin’s status as the number one investment city in Germany and Europe. Interviewees quoted in “Emerging Trends in Real Estate Europe 2018’ suggest that Berlin’s appeal comes from its relatively low yields. Likewise, IP Global director Jonathan Gordon agrees, “Berlin, Frankfurt and Lisbon each provide favourable investing environment.” According to the study, interviewees have observed yields as low as 3 percent for office and retail property and expect rent to grow. One interviewee recalled one of the properties he sold in Berlin, “We sold an asset there that had doubled in price in five years.”

Moreover, according to several Berlin tenants interviewed by Egypt Today, rents are going up fast. “It is quite difficult for us to find space now. It took me a few months to rent a room in a flat at a price that I could afford.” When asked if she believes one should buy a place in Berlin, the Market Risk analyser told Egypt Today, “Yield levels are lower than Frankfurt and Munich, so I do not expect compress going forward. However, real pricing is below other cities, the cost is less and the prospects are huge for Berlin right now. Many expect that Berlin will be the new London. Rent will skyrocket over the next five years, I believe.” As Knight Frank’s research team point out, investors “increasingly need to look to rental growth, rather than continues yield compression, to drive returns.” Thus, a market that has growing rental rates is a market worth investing in.



Frankfurt, the German financial capital, is ranked by PWC and ULI as the joint second best European city to invest in. According to projections by the Association of Foreign Banks in German, the next 24 months will see 3,000 to 5,000 new jobs in Frankfurt as a consequence of Britain leaving the European Union. Citigroup, Goldman Sachs, Morgan Stanley, Nomura Holdings and Standard Chartered have selected the city for their new EU headquarters. Meanwhile, UBS is believed to take the same decision soon.

“Brexit has really been a blessing to Frankfurt,” commented a London-based estate agent to Egypt Today. His claims do in fact hold up. Frankfurt has seen a significant surge of investment activity. In the second half of 2017, property worth €2 billion changed hands, a remarkable increase from the first half’s €0.8 billion. With offices being taken up and the finance capital becoming increasingly desirable, a property developer would be wise to invest their money into building office blocks in the German city or buying a shabby building and transforming it into a high-end office block.

Munich has been labelled by interviewees of PWC and ULI’s “Emerging Trends in Real Estate Europe 2018” as great for “transactions like forward-findings.” The pricy city suffered an incredibly low office vacancy rate in the middle of 2017 of 4 percent. This, like Frankfurt, provides investors or property developers with a great opportunity to turn up shabby buildings or bring forward developments, which would then be rented in one of Europe’s dearest markets at a relatively high price. Given the low construction costs, relative to other cities, it is worth investing in development in Munich.



Denmark, Sweden and Norway

Between Denmark, Sweden and Norway, Denmark’s Copenhagen takes the first place in terms of investment prospects followed by Sweden. Norway is expected to slow down sharply. Recent very low – negative, in fact – krone interest rates, rising urbanization and low unemployment rates have left the prices of flats in Copenhagen above the 2008 pre-cash levels. These factors coupled with a rising number of international students going to the rich city has led to a rise of residential house prices and increased demand.

The flow of capital into Denmark during 2017 has also been a positive indicator for the city’s increased desirability. According to a Denmark-based international development researcher, “There has been a hike in players searching to diversify their portfolio in Denmark, as well as other Norwegian players and neighbouring Finland.” The first half of 2017 saw the doubling of multifamily transactions, with 80 percent of the buyers being foreign.

Copenhagen’s, and Denmark’s, more generally, desirability, leading to the spike in residential house prices and rent, are also because of the rising influx of tourists to the country and their positive human development. The Global Destination Cities Index, published by MasterCard, ranked Copenhagen as one of the quickest-growing destinations in Europe. According to the report, the city saw an 8.1 percent increase in visitors between 2009 and 2016. The rising influx of tourists has left the city’s property market with high demand and great potential for growth.

Denmark is also among the best countries in the world to do business according to the World Bank’s “Ease of Doing Business Index”. Commenting on this, the country’s current Foreign Minister, Anders Samuelsen, said, “Denmark is in tough competition with other countries when it comes to attracting companies, investment and qualified labour. … So, we must continuously work towards reducing costs and removing bureaucracy so the big companies of the future choose to invest in Denmark instead of our neighbours.” Despite being formulated to attract big companies, smaller firms and individuals can also benefit from the reduction in fees and lessening in bureaucracy.

Sweden’s Stockholm was ranked eighth by PWC and ULI’s analytical team. Similar to Denmark’s capital, Stockholm is reaping the benefits of a growing population and quick urbanization due to a flow of migrants and refugees, many of whom are young, ambitious and well-educated. A local real estate advisor told Egypt Today, “The rise in properties are particularly felt in the city centre due to the new ring road and tramways that is expected to revive the suburban market.” According to the advisor, those looking to invest in the country should look at suburban areas as they are set to appreciate remarkably well.



Norway, on the other hand, is a country from which one should stay away. After eight years of quick growth, Norway’s property market is sharply slowing down, as can be seen by the publications from Statistics Norway. Additionally, stricter mortgage rules, aimed at slowing the rise of property prices, were implemented on January 1, 2017, leading to market stagnation. According to Statistics Norway, nationwide house prices index rose by a mere 0.73 percent in 2017, a sharp decline from 2016’s y-o-y rise of 10.09 percent, 2015’s 4.54 percent and 2014’s 5.8 percent. To calculate the real growth, Global Property Guide calculated the growth percentage, accommodating for inflation; they found that house prices actually fell by 0.6 percent in 2017.

Asserting this further, Halfdan Fenwick Grangard, a senior economist at Svenska Handelsbanken in Oslo, said, “We believe there is still further downside to prices both nationally and in Oslo, as the stock of unsold houses is still elevated. … We expect housing prices to fall moderately over the next few quarters before levelling out.” Prime Minister Erna Solberg told investors and the population, “What we’re seeing now is a normal adjustment of the housing market after years of rising prices.” Although reassuring, the prime minister’s comments, as well as those by Grangard, support the view that investors should stay away from Norway for the time being.



For the love of the Flamenco: Spain

Demand is up, mortgage lending is growing and the price of desired property is stable or rising, according to Spanish Property Insight’s Mark Stücklin. He told Spanish Real Estate, “There is still a vast glut of homes built in the wrong place for which there is little demand.” Thus, a warning here must be made to those thinking of investing in Spain: you need to do extensive research and, preferably, team up with a local actor.

The prospects of Madrid are the highest in Spain, followed by Barcelona. The country’s recovery is going at full speed, unemployment is falling steadily (although still at 17 percent at the beginning of 2018) and its gross domestic product (GDP) growth was at an impressive 3 percent last year and is expected to be the same in 2018. That being said, many are worrying about the Catalonia issue. However, BNP Paribas Real Estate Research suggests that the Spanish Central Government and Catalonia’s disagreements will not affect the market. According to the way that the government has been reacting, the consequences of the disagreement will be short lived, concludes BNP Paribas’s research.

The latest data available from Lucas Fox illustrates that Lucas Fox Madrid’s sales have nearly doubled in 2017. Half of the homes sold were new and half of the market movement came from foreign investors, mostly from Latin America, with the average price of properties holding sold at €1.4 million, more than double that of 2016. The report also shows a 92-percent jump in the number of sales transactions and a 311-percent increase in sales values during 2017.

The Institute of Statistics (INE) also released figures that showed a 20-percent increase in the number of properties sold in the first 11 months of 2017 compared with the same period in 2016. Official figures from January 2018 show that Spain’s property market received up to €800 million, suggesting a surge in the market. Thus, it is clear that Madrid is a key city in the Eurozone’s property market today, certainly one that investors should keep an eye on and aim to add to their portfolios.



Bring out l’escargot: France

France’s capital, Paris, ranked fourteenth of the PWC and ULI’s report, while Lyon ranked 21st. The priciest capital in Europe is still the focus of investors wanting gateway cities, therefore, demand is still high on the capital. Despite having high prospects for rental growth, with rental rates positively trending over the past few years, investors seem to believe that Paris is pricy and difficult to invest in due to the complexities around building permits and employing workers. Still, the on-going investment into the Grand Paris railway expansion and the 2024 Olympics translate to positive support for the city’s real estate market. Rent is expected to continue to grow until 2025.

The “Macron effect” is also another reason why France has generally remained desirable to investors. After fears of alt-right rise in the country, Macron winning have left investors relieved. His government has also improved confidence in France, gaining a reputation for being progressive, forward-looking and pro-foreign investment. Macron’s government have spoken about the boost expected from reforms to taxes and the labour market, leaving investors believing that the Cabinet is strategic. Interest in Lyon stems from investors’ desire to invest in Paris but not being able to as a result of its incredibly high prices.



The so-called ‘Tier Two’ countries

Austria’s Vienna, Hungary’s Budapest and Luxembourg are all expecting positive appreciation rates and rising rents during 2018.

Investment in the Austrian commercial real estate market reached €2.4 billion during the first half of 2017, an 80-percent increase from the second half of 2016. Three-quarters of this volume was transacted in Vienna and more than half of the capital that entered the market was from German Investors who recorded the most prominent transaction in 2017. First, Allianz Real Estate purchases The Icon Vienna office development. Second, Deka bought Austria’s tallest office building: DC Tower. Currently, as an Austrian-Egyptian investor told Egypt Today, “There is much room to invest in student housing. Students are coming to Austria from all around the globe, providing constant income to property owners.”

Hungary’s Budapest has ranked tenth on the CBRE’s annual Investor Intentions Survey published March 2017. An increase of Egyptians going to the capital for work and study also provides a great opportunity for Egyptian investors there as they would be able to invest in Budapest and market for student housing here and there.

An Egyptian investor who has recently bought property in Budapest told Egypt Today, “The capital is diverse and very energetic. There are many students. It provides a great opportunity for businessmen, especially those with little capital.” On his own experience in the city, the investor said, “I went there because my daughter has just started studying there. I realised that there is a shortage for good, clean and well-priced student accommodation, and I decided to act. I partnered with two local actors though to make sure I do not lose my capital.”

With a GDP growth of 4 percent, most international investors are willing to invest in Luxembourg now than ever before. There is one clear problem with Luxembourg though, it is one of the most expensive places to live in Europe, meaning that many will not move their business there due to the high maintenance and living rates. When investing in Luxembourg, investors often have two goals in mind: either to get a foot into Europe, as one interviewee told PWC and ULI researchers; or, they buy property as a long-term investment that they plan to sell years later, a smart move given property’s steady appreciation there.



Britain: Beclouded by Brexit

Despite the gloomy predictions that clouded the United Kingdom’s investment skies as a result of Brexit, these concerns did not materialize. The head of capital markets research at Knight Frank, Anthony Duggan, says, “We expect that pricing will remain firm into 2018 with London offices' safe haven status still playing a key role in the rationale for overseas investment … outweighing the on-going short-term concerns over Brexit,” For Duggan, the slowdown that occurred in the UK’s market is natural and was expected.

London is the least profitable city in the UK according to the PWC and ULI’s ranking. Manchester and Birmingham, however, show great potential. Expectations for rental growth are high in the UK’s “capital of the north,” as office take-up kept with the long-term average in 2017’s first six months and no new buildings are expected to be completed until the beginning of 2019. The high demand in Manchester due to the increasing amount of offices relocating there and the rising number of students moving there, has made Manchester a great opportunity for those who are looking to buy property for letting and long-term appreciation.

Birmingham has also been more attractive and investors are expecting the city’s properties to rise as a result of the HS2 rail project that will increase connectivity and mobility potential. Birmingham is at the heart of the UK’s distribution network, making it an ideal spot for investors.

Edinburgh and Glasgow are also looking for investors, with both cities providing the opportunity for individuals with less seed to invest their money into a long-term project that will give them monthly income, while also appreciating well. The high number of 21-to-35-year olds, who make up 28.5 percent of the population, mean that demand for property purchase will increase significantly in 10 years’ time. With rental property in Glasgow currently in a better position than most in the UK at 6.9 percent and property prices increasing steadily and continuously, investors should look to Glasgow for a long-term investment. Edinburgh is a mirror image of Glasgow.