By Iryna Pylypchuk
While Brexit has created some uncertainty in the EU’s political environment, we don’t anticipate a negative impact on commercial real estate investor sentiment for core eurozone.
Most core eurozone markets have very strong domestic investor base, which tends to be ‘net investor’ throughout most of the real estate investment cycle. In addition, it has significantly lower exposure to cross-regional capital than the UK at 23% vs 36%, making core eurozone markets less susceptible to political changes.
In fact, we expect some increase in allocations to ‘safe haven’ markets – with Germany set to benefit the most, followed by France with investment focused predominantly on the Greater Paris market.
Pre-Brexit, Germany’s safe haven status and strong economy meant that some international investors were looking to further increase the German share of their European real estate allocations. This trend has only gained pace since the UK’s Referendum result and looks set to continue with on-going uncertainty around the exact terms of a Brexit deal.
At a time when an increasing number of European investors are looking for international diversification – German real estate, renowned for its stable performance and low volatility, complements an existing European portfolio perfectly. Furthermore, it is an excellent choice when considering counter-cyclical strategy.
France, or more specifically the Ile-de-France market, is also likely to benefit. It is the largest regional commercial real estate investment market on the continent, with a long-term investment turnover of € 13.6bn per annum – a quarter of the total core eurozone investment market. Its large size and high liquidity, combined with stable fundamentals and constrained supply of quality real estate, are key in attracting investor demand.
Moving forward, the key is to try and ascertain any changes in occupational requirements ahead of any specifics around what Brexit actually means. While we don’t expect the occupier markets in the core eurozone to be notably affected by the Brexit, those tenants who are significantly reliant on free movement of goods and services or have a strong dependency on the UK market are most likely to be negatively affected.
The industries most likely to be exposed are financial and business services, international logistics and manufacturing exporters. However, such affects will take some time to feed through and, arguably, there is enough time to manage or mitigate existing exposure. In addition, it is only a relatively small proportion of such industries that are likely to be impacted – major international companies, or those located in major markets and servicing local businesses will continue to perform well.
When considering potential occupational upside, we don’t expect the core eurozone markets to see marked changes in occupational requirements until there is more clarity over the Brexit terms. However, over a mid-term, Frankfurt, Paris and Dublin could be net beneficiaries IF, and this is where we are very uncertain, and only IF the UK and the EU can’t agree terms on passporting rights.
With an established banking industry, the ECB headquarters and as much as 25% of occupier demand coming from financial and banking industries, Frankfurt is the leading contender for potential relocations. Paris comes a close second with Euronext, as well as a large banking industry. It also has a suitable offering of larger office floorplates in sub-markets such as La Defense. On a smaller scale, a city that potentially offers an easier transition is Dublin; being English-speaking with close economic ties to the UK and low corporate taxes.
Overall, the core eurozone’s commercial real estate markets are quietly confident as we move into the holiday period. Unabated investor demand, shortage of quality assets, and further yield tightening remain the key themes. Indeed, bringing the wider financial markets into the mix – direct real estate will continue to deliver strong outperformance, and with interest rates and bond yields expected to remain lower for even longer – allocations to this asset class are, and expected to continue, increasing, especially from investors traditionally heavily exposed to the government bond markets.
Brexit or no Brexit – it is business as usual as the ‘weight of money’ looking to invest in real estate continues to grow.
Iryna Pylypchuk is a senior European real estate analyst at Fidelity International
