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Are investors overlooking European property?

by Alex Plough on Oct 18, 2011 at 16:18

Are investors overlooking European property?

As sovereign wealth funds compete with overseas clients to buy up every square inch of London, real estate investors could be overlooking lucrative opportunities on the other side of the channel.

High quality residential and commercial property in the prime locations of Paris, Berlin and the Nordic countries can offer both capital growth and inflation-linked rental income. However, differences between the continental and Anglo-Saxon markets present both opportunities and traps for the unwary investor.

Paris is seen as one of the top five safe havens for investing in residential property. Like London’s West End, much of the city is constrained by building regulations designed to protect its historic centre. As a result, the supply of prime residential real estate is tightly constrained and in constant demand.

Areas such as the business district of La Défense are attractive to investors looking for rental income from commercial property. The difficulty for developers to finance new projects has caused a chronic undersupply of prime office space. Rents across the EU are also often linked to the consumer price index (CPI) and commercial real estate is increasingly seen as a hedge against future inflation.

According to Alex Ross who manages Premier Asset Management’s Pan European Property Share Fund , which has returned 18.3% over three years compared to 14.2% from the wider IMA property sector, Berlin represents the next core market in Europe after Paris.

‘German property values haven’t moved for the last 30 years, they didn’t go down in the crash or up in the bubble. As an investment for income rather than capital growth, it’s a good inflation cover for the long-term. We are also starting to see a lot of growth in Berlin for the first time in a number of years,’ he said.

Marcus Phayre-Mudge, manager of the TR Property Investment Trust for F&C, trading at a 5.8% discount to Net Asset Value (NAV) at 167.2p a share, agreed that prime real estate will always hold its value but warned against the traditional safe haven of Switzerland.

According to Phayre-Mudge, the combination of interest rates close to 0% and the prospect of structurally high inflation after last month’s currency intervention could prompt an ill-thought through rush of investors into Swiss real estate. Ross agreed that surging rental growth may present a short-term opportunity play but warned that there is the danger of a ‘significant property bubble’ which could damage investors who don’t get out in time.

Broader cultural differences also play their role in the markets. Continental property owners tend to be less leveraged than their UK counterparts and hold onto real estate for longer, effectively dampening supply and keeping prices stable. The differences are most stark between the Britain and the Nordic countries.

After going through a banking crisis in the 1990s, the Scandinavian economies went through a process of deleveraging and are now among the best performing in the region. ‘Hopefully the UK will look like Sweden in 20 years’ time,’ said Ross.

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