At the annual conference of EPRA, the European Public Real Estate Association, held in Berlin on 9 September, Tim Leckie, real estate analyst at J.P. Morgan Chase & Co, told delegates that investors in European listed property companies will benefit from around two years of low interest rates, broadening rental growth and rising asset values.
“Rental growth is spreading to Germany, Spain and Ireland after appearing first in the United Kingdom,” Leckie said, “and this is very positive for the NAVs of listed property companies. The summer’s turmoil in financial markets has probably pushed back the lift-off point for interest rates or flattened the speed at which they will rise. This means that for the next 24 months or so we will have a continuation of the positive environment for the property industry: broadening rental growth and rising property values against a backdrop of historically low interest rates.”
Research carried out by Leckie and fellow J.P. Morgan analyst Neil Green suggests that the slide of global stock markets in August presented an attractive opportunity to buy listed real estate stocks to capture this rental growth and the appreciation in property values. The United Kingdom offers the best prospects in Europe, with the IPD All Property Index showing that rents have risen by 1.2 percent since March.
The fastest rental growth in Europe is in London, where the cost of occupying offices in the City of London or the West End has risen by 44 percent and 34 percent, respectively, since Q1 2009. Office markets in Europe’s other major cities have fallen or grown by no more than 5 percent in the same period, Leckie said. The pipeline of new developments in the City of London office market will probably lead to rental growth turning negative from 2018, Leckie warned, due to oversupply.
In continental Europe, rental growth is concentrated mainly in the German, Spanish and Irish markets. Leckie suggested that supply constraints and falling vacancy rates will lead to higher office rents in Frankfurt; German residential assets are increasing rents by 2–3 percent per year; and shopping centre rents in Europe’s largest economy will strengthen as a result of higher retail sales following on from low unemployment, consumer confidence and low inflation. The recovery in the Irish economy, falling vacancies and supply constraints mean that the Dublin office market can expect annual rental growth of 12 percent, while similar characteristics will start to feed through into 10 percent annual growth in rents in Madrid from next year.
“The benign interest rate outlook,” Leckie added, “means that, with property yields still at a significant premium to benchmark interest rates, there is still scope for capital appreciation for real estate assets across Europe. This is particularly the case when there is rental growth to support these higher values. These conditions underpin why we see good value in Europe’s listed property sector, offering a potential 16 percent upside to investors.”