Residential & Commercial Real Estate markets in Europe, Review 2007 – Outlook and Expectations for 2008

Implications: It might give an alternative interesting consideration and a source of important information to potential investors by their Investment strategy in European Real Estate in 2008 as an alternative to the US.

Analysis: First, benefiting from the general economic recovery in Western Europe and even wealthy outlook for most of the European countries, especially also the Eastern and Central European ones (those joining the EU, but Russia and Turkey particularly too), so 2007 will remain a good “vintage year” all over the European Real Estate markets despite the “Subprime” effect in the second half year. A slight increase in transaction as well as volumes (sqm and Investment) in comparison to 2006 on nearly all markets excepted the Residential market where a stabilization or slight slow down in some countries could be recorded. The Office and Retail markets did well (strong demand, increase of rental income slightly over inflation and further decrease of vacancy rates in most of the major European conurbation areas). the outlook for the next years is quite good, especially also in Eastern and Central European countries where new huge demand is coming (first Retail and Office, later on Residential) and ongoing investment climate still positive. However nobody knows really the follow up effect of the “Subprime syndrome” in 2008 yet.  

The global RE construction market in Europe will probably end with a new record by ca. 1.500 billion EUR in 2007 (ca. 1.450 billion€ in 2006) there from the biggest part 46% for the Residential market, 32% Commercial RE and 22% for Infrastructure Investment. Global Growth could be expected by 2 – 2,5% or a little more over the next years with even higher development rates in Eastern and Central European countries where the perspectives are quite good (5 to 7%).  

However Residential RE registered a slight slow down by ca. 2,3 million new residential units (2,4 million in 2006, expected were up to 2,6 million in 2007), due for the major part to a decrease in Germany (higher VAT, further abolition of subsidies) in fact the lowest level reached since the reunification (probably even less than 210.000 RU against 235.000 in 2006) and also Spain where the owner-occupiers rate is now one of the highest in the world by 86%, here the slow down could remain significant. Nevertheless, due to an expected further better economic situation and tax framework in particular in Germany, France and the UK, as well as the new coming markets in Eastern and Central Europe and further strong demand in some other Western European countries, the Residential market could be better in 2008 and especially from 2009 on. In Germany the Residential market should recover by more than 250.000 Units/year (increase of single households, strong increase of special housing saving accounts, “Riester Rente” pension funds also for housing etc.). In France further high demand (also the foreign one), recent tax advantages, public measures for special low cost housing could boost the market up to 450.000 - 500.000 Units/year. As alone Germany, the UK, France, Spain and Italy totalize 75% of the European Residential market and the Eastern and Central European ones still at the time negligible (but coming in near future), the remaining markets in Western Europe, especially in the Scandinavian countries, Benelux or even Italy, Ireland or Portugal are more or less captive markets for the insiders (domestic demand, local private investors and property companies, banks or insurances).    

Nevertheless concerning the residential area, the big deals and especially those like the recent privatization of public property companies in Germany (ca. 10 to 14 billion EUR/year in the last past years) will not anymore be the focus due to less targets on the market (reluctance of tenant organizations or even public authority), but maybe also too high expectations of the investors, difficult privatization to tenants, complicated handling, higher interest rates or Equity injection (investment was not every time the hope worth). Smaller well balanced portfolios or resale of some “big deals” in smaller packages might be an interesting and opportunistic alternative for 2008, the insider Investors or local RE and Property companies will surely consider this.  

Commercial RE, especially Offices and Retail as the larger part (ca. 250 billion EUR, there from ca. 17 billion in Eastern and Central Europe at the time and 58% foreign Investments) as well as Logistics and  Industrial Property did again well in 2007 due to strong demand, lower vacancy rates, increase of rents,  thus better cap rates. Trends are expected to continue in that direction in 2008, however priority for success is still to consider investment in the major European cities or conurbation areas called “The major European RE Market”, like for instance in Germany “the big six”, Munich, Hamburg, Frankfurt, Dusseldorf/Cologne, Stuttgart and Berlin, in France the Paris Region Ile de France, Marseille, Lyon, Bordeaux, Lille and Strasbourg, in the UK, London conurbation, Thames valley but now also Manchester, Glasgow, Birmingham and Edinburgh, in Spain Madrid and Barcelona, the Benelux, Brussels, Luxembourg and Amsterdam. Strong emerging markets in major locations in Eastern and Central Europe will absolutely have to be taken in consideration too, especially Moscow, St. Petersburg, Istanbul, Ankara, Prague, Warsaw, Budapest, the smaller emerging markets Bratislava, Zagreb, Vilnius, Riga, Tallinn, Kyiv, Sofia, Bucharest where however further Infrastructure Investment are first priority and some other interesting Western European locations as Lisbon, Milan, Rome, Helsinki, Stockholm, Athens, Zurich, Vienna, Copenhagen and Dublin. Not to forget, in near future yields of RE Investment in Europe will be dominated or focused merely by growing rental incomes, further decrease of vacancy rates and less through profit by later sale of portfolios. As said the biggest markets in Europe remain Germany, followed by the UK, France, Spain and Italy. Interesting to notice is also the (positive despite stocks’ storm) start of the first listed REITs in Germany in 2007 (mostly invested in Commercial RE), a huge potential seems to be available for 2008 and later.          

Investment in European Real Estate, especially in major conurbation areas or cities could be at the time one of the best investment strategy over all and the focus for the coming year will not only be the residential but particularly the commercial real estate market (offices, retail, logistics). Interest rates and market prices remain affordable, thus still interesting cap rates to be expected. That’s why investors should absolutely consider real estate in Europe in their investment strategy or plan for 2008!   

So get reliable research information and be in the starting block if you expect to get the very best investment in 2008!  

For more details or further information, please ask your GLG Research Manager.  

I wish you all a very nice and joyous Christmas and New Eve time as well as a happy and very successful New Year 2008!  

GLG-Leader RE Council Member: Jacky Starck, Berlin (Germany)   Wednesday, 12/19/2007