by Michelle Morra
Low interest rates are spurring renewed activity in European real estate in spite of geopolitical uncertainty. Brad Olsen, President, Atlantic Partners, Ltd. says, “The attitude in Europe right now relative to real estate is as positive as I’ve ever seen it.”
Germany has seen a dramatic shift in yields. “Prime core yields across Germany in the major cities have dropped dramatically,” Olsen says. “My favourite example is Munich, where I think now prime office yields would be in the low 2s. That is down probably 100 basis points in the last 18 months.” Olsen says the drop is a reflection of the flow of capital, predominantly from German investors, into secondary markets as well as into the logistics sector.
Yields in the Dutch market have been higher than in Germany, which has attracted investors in the residential sector. Olsen explains that unlike Germany, which tightened rent control after the grand coalition, the Netherlands essentially have a free market rental contract. “There’s no rent control as long as rent is above 700 euros,” he says—a more attractive prospect for investors.
As for the UK, given the uncertainty relative to Brexit, Olsen says, “People talk about potentially 20 percent corrections in central London, but I think everybody acknowledges that we don’t know yet what the impact of Brexit is… and that we won’t know the answer for probably years rather than months.”
Olsen adds that the nordic countries, meanwhile, continue to be very strong in general, thanks to both domestic capital and German institutional investors. Spain, he says, “has become amazingly almost a core market again,” which surprises and even concerns him because the market is still volatile, especially since the Catalonia referendum. Politics also contribute to uncertainty in Italy, a market that “remains a question mark for a lot of people,” Olsen says, despite the significant net family wealth in its cities.
Geopolitics are on investors’ minds, not only in Europe but globally. The US has seen a slower flow of capital from German investors, according to Olsen—and not only because they are leery of the US President and what he might do next. “Multiple investors have talked to me about the pricing of currency, the fact that the dollar is expensive; and for those investors who have to hedge, the hedging costs of coming to the US are quite high,” he says. “I think that maybe the hedging costs⁄currency issue is more relevant to keeping money out of the US from Germany than Donald Trump… though the two may be related.”
Asked what European investors are saying about interest rates, Olsen says some predict that with growth in the EU, rates will not stay low as long as previously thought. “But the flipside of that,” he says, “is a pretty consistent view among northern Europeans that the European Central Bank is not as likely to raise interest rates as early as the economy might dictate or suggest, simply because higher interest rates would essentially bankrupt southern European countries.”
Published in Canadian Real Estate Forum