Beginning of a new property cycle

• Marked recovery of real estate investment climate
• Demand strongest for offices and residential property

Optimism is returning to the major European real estate markets, even though the pandemic is still not fully under control. The Real Estate Investment Climate Index compiled by Union Investment in Germany, France and the UK showed a marked recovery in all three countries in the first half of 2021 and has returned to pre-coronavirus levels or even slightly above. The UK is leading the way. Here, the national index rose by 4.3 to 68.7 points compared to the survey in the second half of 2019. In Germany (66.7), the national index exceeded its pre-pandemic level by 3.5 points. Only France slightly missed the mark: the national index was 67.6 in the second half of 2019 and currently stands at 67.2 points. The coronavirus crisis that paralysed the markets thus seems to have been overcome on the real estate front.

Real estate investors’ expectations have risen significantly:
“Property investors are taking a more optimistic view again, buoyed by rising vaccination rates and the easing of travel and access restrictions. Investment markets are recovering, employment is rising and lettings are increasing. There are many indications that we’re at the beginning of a new property cycle, despite the pandemic not yet being fully behind us,” said Olaf Janßen, head of real estate research at Union Investment.

In particular, the expectations of the 151 institutional property investors surveyed by Union Investment across the three largest European economies have risen significantly. In all three regions, this sub-index is higher than it was before the pandemic. In France, the indicator rose by an impressive 19.1 points in the first half of 2021 and is currently 2 points above the pre-coronavirus level. In the UK (57.2) the indicator rose by 11.8 points and is 10.6 points above the pre-pandemic level, while in Germany (59.6) it increased by 9.5 points – 9 points higher than at the start of the pandemic.

Changing demand in investment markets:
The real estate markets are not immune to the impact of the coronavirus pandemic, however. Eighty per cent of the investors surveyed by Union Investment expect to see changing demand in European real estate investment markets over the coming 12 months. This means that in particular, the quality of properties and tenants will now be scrutinised much more closely. Some 73 per cent of respondents expect buyers to become more cautious overall.

Demand strongest for offices and residential property:
When asked about their investment focus over the coming 12 months, respondents ranked offices and residential as their two most favoured asset classes. Some 33 per cent of respondents plan to invest primarily in offices, while 26 per cent are aiming to invest in residential property.

The increase in home working since the start of the pandemic has clearly not affected the popularity of office properties in any major way. Only 13 per cent of respondents intend to switch their focus away from office investments due to the rise in home working, and only 3 per cent are planning to divest office properties. However, 68 per cent of respondents are paying more attention to the location and specification of offices.

In Germany, unlike in France and the UK, residential is the most in-demand asset class rather than offices – 40 per cent of respondents intend to invest in the segment in the coming 12 months. “For many years, residential property was considered the boring element in a portfolio. It’s now one of the most attractive. This is due to security having become much more important in the wake of the pandemic, with residential properties seen as stabilisers in the portfolio. And rightly so. They have a low correlation to cyclical developments in the commercial real estate market, deliver stable cash flows and offer good long-term prospects for value growth,” explained Olaf Janßen.

Domestic market favoured:
When it comes to residential investment, the investors surveyed show a clear preference for their home markets. This is because they usually know these markets best and can also easily visit them if international travel restrictions are reimposed in the future. Accordingly, 97 per cent of German respondents intend to invest in Germany, 90 per cent of French respondents in France and 82 per cent of British respondents in the UK.

Where rents are rising:
Scarcity always triggers price rises. Consequently, the surveyed investors expect rents to rise fastest for logistics and residential properties over the next 12 months. “The logistics sector is benefiting from the growth of online shopping and from brick-and-mortar retailers expanding their online business. This is driving high demand for warehouse and distribution facilities, in particular for modern logistics properties and parcel distribution centres. The residential property market was only briefly impacted by the pandemic because extensive government assistance schemes prevented unemployment rising rapidly, unlike during other crises,” said Olaf Janßen.

Greatest risks for property portfolios:
The assessment of risk for individual portfolios differs from country to country. In Germany, 53 per cent of respondents rate the lack of suitable investment properties as the greatest risk to their business. In France, the general decline in rental income is considered the biggest risk (48 per cent of respondents).

Shops and hotels are currently facing specific challenges. Nonetheless, half the respondents rate changes in travel behaviour and the associated challenges for hotels as a relatively low risk, while 15 per cent rate this as high.

Some 41 per cent of respondents consider declining demand for retail space to be a low risk, whereas 23 per cent regard it as a high risk for their portfolio. It all seems to come down to how funds are invested. “In the retail property sector, the market has been a story of two halves for some time now. On the one hand, there is high investor demand for retail properties that cater for daily needs, such as supermarkets, discounters and neighbourhood malls. On the other hand, there has been a significant drop in demand for stores in premium locations and for shopping centres,” said Olaf Janßen.

About the Union Investment survey:
Union Investment launched its European Real Estate Investment Climate Index in 2005, with the survey taking place at six-month intervals since spring 2008. The index is based on four indicators: market structure, the general environment, location factors, and expectations, each with a weighting of 25 per cent. For the latest survey, market research institute Ipsos conducted interviews between July 2021 and August 2021 with 151 property companies and institutional real estate investors in Germany (n=60), France (n=46) and the UK (n=45).

Source: Union Investment