Mario Draghi’s quantitative-easing program has a new set of supporters: real estate buyers.
Commercial property purchases in the euro area surged 32 percent in the year through June, according to London-based broker Knight Frank LLP, with investment transactions totaling 104.2 billion euros ($117.5 billion). Deals tripled in Portugal and more than doubled in Spain.
International investors are plunging into the market as the European Central Bank president’s attempts to jump start economic growth triggered a 19 percent slump in the value of the euro against the dollar and 11 percent against the British pound, making property look cheap. Rents are also set to climb as the economy recovers, because there’s been a shortage of new construction since the global financial crisis, according to asset manager M&G Real Estate.
“After a couple of years of double-digit returns in the U.K. and the U.S., investors feel Europe is next,” said David Jackson, who manages 1.2 billion euros of European property at M&G Real Estate. “One of the key stimuli for that has been the QE package.”
M&G Real Estate has been buying food stores in Germany and retail properties in cities such as Milan and Copenhagen to benefit from increases in consumer credit that should boost demand for retail property, raising rents and values, he said.
Total return, a combination of rental income and value gains, from commercial real estate in mainland Europe was 4.45 percent in the second quarter, the highest in at least six years, compared with 4 percent in the previous three months, according to data compiled by MSCI. Investors in the Stoxx Europe 600 Index lost 2.5 percent, including reinvested dividends, during the second quarter, while European investment-grade bonds lost 2.8 percent.
Property buyers are being attracted by yields for the best office properties of 5 percent in Barcelona and 6 percent in Lisbon, compared with 3.5 percent in London’s West End, Knight Frank said.
“Investment volumes continue to be driven upwards by the strong international demand for European commercial property, particularly from U.S. investors,” Andrew Sim, head of European capital markets at Knight Frank, said in a statement. “European transaction volumes are approaching the levels seen at the market peak of 2007, and several countries may well set new records this year.”
Commercial property investment across Europe, including the U.K., is forecast to total about 230 billion euros this year, the most since 2007, according to Knight Frank.
Some analysts are more wary of the region’s prospects. Investors in real estate shares in continental Europe should “remain cautious of chasing share prices higher in the absence of rental growth,” JPMorgan Chase & Co. analyst Tim Leckie wrote in a note to clients this month.
Hong Kong-based Gaw Capital Partners, which oversees $10.6 billion of real estate, is among the buyers attracted by property yields and the euro’s weakness. It’s seeking to purchase office properties in Germany, Ireland, Spain and Portugal, according to Christina Gaw, managing principal at the fund manager.
“The fall in the euro, together with economic recovery in most of the euro zone countries, has attracted a huge amount of investors,” said Patricio Palomar, head of alternative investments at brokerage CBRE Group Inc. in Spain. “It’s made competition for assets fierce.”