Steering through an uncertain Europe


October 3, 2022

Posted by Macquarie Asset Management


This article was first published by PERE in October 2022 and is reproduced here with permission.

After a ‘wait-and-see’ period, political division and conflict in the region is set to drive capital westwards

The war in Ukraine has become the major concern for institutional real estate investors in Europe, especially as there is no consensus on when or how it might be brought to an end.  This uncertainty has led many to put a halt on their investment activity.

However, while the pause is affecting transaction volumes, prime real estate assets in the continent’s major cities are still recording strong rental growth and some investors are on the hunt for opportunities.

Political tensions and divisions are amongst the macro trends that real estate investors are in the habit of tracking, especially since economic and regulatory effects tend to be downstream of politics. “Investors pay attention to politics, especially when investing in emerging markets where the political situation is more volatile,” says Christian Goebel, co-head of core/core-plus real estate at Macquarie Asset Management.

“However, political divisions currently exist all over the world, whether that’s in Asia, in Europe or in the Americas. The main concern that investors and asset managers should deal with, however, is whether political changes and turmoil affect the long-term outlook for any given market,” he adds.

The greatest cause of political division and concern for real estate investors is naturally the ongoing conflict in Ukraine. Since Russia invaded its neighbor in February, disruptions to the supply of grain and other foodstuffs from Ukraine and gas and oil from Russia due to sanctions have been a major contributor to inflation worldwide, alongside the effect of huge liquidity injections to fight the covid pandemic.

Europe is united in its condemnation of the invasion, but not in its conclusions as to a possible resolution. For real estate investors, this uncertainty is as much of a concern as the immediate effects of the conflict. Europe is facing a shortage of energy this winter, which could cause further division as nations battle to secure access to natural gas from outside of Russia.

Meanwhile, political tensions between the US and China continue to cause concern amongst investors, as do the supply chain problems which have dogged the global economy since the pandemic.

“We currently see a lot of uncertainty in the global marketplace. And while most institutional investors have become accustomed to uncertainty, I think we do find ourselves in special times,” says Goebel.

“Many investors are therefore on hold, delaying investment decisions until greater confidence returns. Investors are trying to work out what this combination of political and economic uncertainty could mean for their target allocations, including real estate.”

Goebel’s co-head of core/core-plus real estate at Macquarie, Florian Winkle, is keen to emphasize that real estate investors are not yet jumping ship, however: “Despite this considerable uncertainty, we are not seeing investors running for the exit or selling down assets en masse. However, those managers who have prioritized a partnership approach and demonstrated investment discipline in recent years, are likely to benefit as the flight to quality accelerates.”

This pause has shown up in the latest transactions data from MSCI Real Assets. In the second quarter of 2022, transaction volumes in Europe were down 19 percent on the previous year. Germany, where volumes fell 56 percent in Q2, and Central and Eastern European nations suffered the most.

Goebel says: “The Central European market – both, in terms of transaction activity and capital inflows – has slowed as a result of the ongoing uncertainty in neighboring countries. Most other European markets continue to be active, albeit at lower transaction volumes.”

No end in sight

Whether this fall-off in transactions is temporary or not is hard to assess, but if the conflict continues, there may well be a rebalancing in some markets. “Some central European markets might need to be reassessed by investors,” says Goebel. “Depending on the length of the conflict, we may continue to see skilled labor and companies moving their operations westwards, with near-shoring in markets like Poland intensifying and providing tailwinds for the local real estate sector, and logistics in particular.”

The effects of the war in Ukraine are significant and they are not the only ones contributing to a reassessment of real estate values globally. However, most European markets are not suffering from oversupply, suggesting real estate markets there will be resilient.

“We expect only a limited amount of distress to enter markets in the looming downturn, which could suggest this is the time to take advantage of opportunities,” says Goebel. “In fact, we have already observed numerous markets which have seen some significant repricing, and while nobody wants to catch a falling knife, we believe that strategic investments at attractive repricing in today’s market will turn out to be smart buys as confidence returns.

“While a large number of real estate investors are currently monitoring markets, others are very active, taking advantage of opportunities. In our view, this is the right strategy.”

Germany saw transaction volumes fall 34 percent in the first half of 2022, one of the worst performances in Europe. Investors are watching to see if the EU’s powerhouse economy can make it through the crisis intact. Winkle says: “Investors will be closely watching the energy situation in Germany as we enter the winter months. If no solutions can be found, German industry and the broader economy could be facing challenges of a scale unseen in many years.

“We are of course hopeful that this situation can be avoided, but investors will need to remain vigilant. With this uncertainty, transaction volumes have decreased. However, we have also seen significant rental growth for properties in prime locations.”

The regional picture

Despite Europe’s political divisions, the shared currency of the eurozone and the common regulatory system of the block continues to support investment from within and outside the region. Goebel says: “Consistency of regulation can be very helpful for investors. Where there are inconsistencies, sudden changes, or poorly targeted or burdensome requirements within a specific local market, some regulation can risk becoming an impediment to efficient decision-making.

“There is definitely room for greater harmonization of regulatory frameworks within Europe, which should help better manage key risks and deliver enhanced compliance, as well as supporting investment flows within the sector.”

Winkle adds: “The common currency is a massive benefit for investors in Europe and it would be fair to say that shared EU regulation does have a certain ‘smoothing’ effect across the region. However, there are still considerable differences between Western, Eastern and Southern Europe. Different tax regimes, for example, can be a serious hurdle for new entrants to the market who may be unfamiliar with them.

“It goes without saying, but Europe is not one homogenous market. The political environment across the region varies considerably, with each country having different political priorities, regulatory landscapes and tax regimes. This can be daunting for some investors, particularly those without teams on the ground who can help them to understand local nuances, track where political sentiment is heading and understand what impact political instability or policy changes may have on asset valuations and returns.”

While there have been local political events – such as elections in Germany in 2021 and France this year – investors are more focused on the regional picture, says Goebel. “At the moment, Russia’s invasion of Ukraine and the current energy crisis are at the forefront of investors’ minds, much more than questions about the national governments or the long-term political divisions in other countries in the region.”

“The reassuring thing this time around is that for the time being there is stronger unity amongst EU member states, particularly as it relates to the single currency,” concludes Winkle. “That collaboration will offer continued stability, and should give confidence to investors as they assess new opportunities across the continent over the coming year.”   

Investors have adjusted to Brexit

The UK’s departure from the EU is still a cause of political division within the nation, but Britain’s ‘semi-detached’ status could prove an advantage for real estate investors going forward.

“Most investors are comfortable with the fact that the impact of Brexit has receded. In my view, London could be a beneficiary of continued uncertainty on the continent. Capital, for the time being, will be moving westwards. Whether that’s towards Western Europe, the UK or the US markets,” says Macquarie’s Christian Goebel.

“In the long run, I think the UK is going to do well, retaining its role as an intermediary between Europe and the US. I believe that investors will happily return to London, if they haven’t already.”

There has been a trickle of companies in the financial services sector moving senior staff to the continent, and the UK has struggled with an upheaval to customs rules for import and export. However, any fallout caused specifically by Brexit has been tough to identify in a world of disrupted supply chains post-covid. Britain’s problems with inflation, labor markets and airports are replicated across Europe and other developed nations.

Goebel says: “We see some decision-makers continuing to move to alternative European locations such as Paris or Amsterdam; however, at this point in time the impact on the London and UK real estate market is marginal.”

Investment markets are broadly expecting the movement of capital to the global West, just as real estate investors are plumping for prime assets in gateway cities, in order to seek security. “I think this trend of capital moving westwards will be really important as the investor universe becomes more selective,” says Macquarie’s Florian Winkle.

“Besides the current situation on the continent, we could see real estate investors reassessing their positions in some Asian markets as geopolitical tensions there rise.”


This article was first published by PERE in October 2022 and is reproduced here with permission.

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