by Tobias Kotz, Executive Director Institutional Investors at Real I.S. AG.
Long before major politicians started sharing their unfiltered opinions and missives with a worldwide audience via Twitter, it was clear that we should not underestimate the impact such statements can have on groups or entire sections of society. We all need to reflect on which daily news items influence our own long-term investment decisions. Just a few months ago, a range of commentators claimed that the natural laws of the markets no longer applied, arguing that central banks’ ultra-low interest rates would ultimately level the playing field across all markets. Now there are a stream of claims that political interference is increasingly dominating the real estate markets. However, in reporting these claims, the media has often misinterpreted or overestimated their real significance. Investors eager to profit from market trends should therefore ensure they do not overreact to one-off developments. Far more, investors should pay close attention to the relevant real estate markets and how the latest news actually affects them.
In the United Kingdom, for example, surveys by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) show that unlisted British real estate funds achieved returns of 2.2 percent in 2016, compared with 12 percent the year before.1 The results for the German, French and Dutch markets were significantly better; in some cases, more than four percentage points above the previous year’s figures. These results, clearly a reflection of the looming Brexit, have created uncertainty on the real estate markets in the United Kingdom. There is no doubt that exiting the European Union will have an impact on the UK real estate market, or that investments in London will be exposed to higher risks. We anticipate a market correction. However, at the moment it is incredibly difficult to predict the exact impact of Brexit. In the long term, the market may well be very attractive for investors with a suitable risk/return profile.
We have seen similar over-interpretations from the media in relation to the euro area. In Paris, for example, many attribute the office market’s current momentum to Emmanuel Macron’s election victory. A detailed analysis reveals that, in addition to constant demand for core properties in prime locations, investments in versatile office space also offer significant potential. A growing number of startups are being drawn to the City of Light. These “new kids on the block” prefer up-and-coming districts such as the ninth or tenth arrondissements, which offer more favourable rental conditions, combined with an attractive and vibrant environment. As a result, these districts are becoming increasingly relevant to investors pursuing a value-add strategy.
Keeping a close eye on economic and regional market trends is also important in Germany. It may well play a role for investors that Germany has benefited from the prevailing low interest rate climate – but for Berlin in particular, this cannot be the only reason for the real estate market’s growth, especially as no DAX-listed companies are based in the city. Nevertheless, prime rents in the City on the Spree still increased faster than anywhere else in Germany. Prime rents stood at EUR 28 per square metre in the first quarter of 2017, a year-on-year increase of almost 17 percent.2 Just a few years ago, no one was predicting such positive developments in Berlin. The city’s high-tech and online sectors have also been experiencing rapid growth. Berlin has evolved into one of the sector’s most important hotspots, even from a global perspective. It is therefore crucial to identify these specific market trends and evaluate their potential.
So, what do I make of all this? Of course, investors need to be aware of economic and political decisions. However, the potential impact of these decisions needs to be viewed within the context of specific markets. Investors need to evaluate the impact of these decisions on individual investments. These are the decisive criteria for investors. Not column-filling, headline-grabbing media reports or highly-selective tweets.
1) https://www.ft.com/content/a66fea4c-2bf3-11e7-bc4b-5528796fe35c
2) Quelle: JLL Büromarktüberblick Deutschland, 1. Quartal 2017, S. 5.