‘Plenty of reasons to be cheerful about European real estate’

Samuel Duah, Head of Real Estate Economics , BNP Paribas Real Estate

There are many reasons to be optimistic about the prospects for European real estate, Samuel Duah, head of Real Estate Economics, BNP Paribas RE, told Investment Briefings’ Netherlands & Europe Panel, which took place in Amsterdam last week.

‘It is not all doom and gloom’, he said. ‘We may be late cycle, but we are not near the end of the cycle. The turning point is not imminent.’

A positive development is that ‘there is a sense that Central Bank interest rate tightening has been delayed, which is good news for real estate investors,’ he said. ‘The question that keeps coming up is what will happen to yields when bond yields go up? We have turned the question around and asked at what level do bond yields need to rise before property yields respond?’

The analysis done by BNP Paribas came up with is that it will take an average of 150 bps for property yields to respond, which means ‘at least 18 to 24 months before the cycle turns. So are optimistic on 2019 and 2020 and we do not see any major shifts in property yields.’

Over this year and the next we will see a stabilisation of yields, Duah said, so ‘capital growth will not be as strong, except for the markets where there is strong rental growth to come.’

Total returns of 5.8% per annum going forward ‘may be moderate but they are still attractive and driven by income, which will do all the heavy lifting going forward. Investors cannot expect the double digit total returns we have seen in the last two years.’ The advice is to be strategic and really focus on the asset rather than the market.

‘We remain optimistic about real estate’s relative performance compared to other asset classes,’ Duah said.

On the negative side, economic growth is slowing and that is particularly evident in the Eurozone. On the positive side, though, employment figures are healthy and on an upward trend, which is crucial for the property sector.

‘The economic indicator that is most relevant for real estate is employment growth,’ he said. ‘You need it for all asset classes, from retail to industrial to offices. We have seen strong levels of growth in most markets over the past five years, especially in recovery countries like Spain, Portugal and Ireland, while countries like the UK and Germany have historically low unemployment rates. Most importantly, prospects are encouraging for the next five years.’