Property proves defensive in a stagnating eurozone

So how has European property fared?

Andrew Hook, manager of the Aviva Investors European Property fund, finds that investors have not been deterred from investing in European property, “in spite of the weak economic backdrop in the eurozone”.

“European real estate capital markets have seen steady growth in transaction volumes, indicative of strong investor appetite for the region,” he says.

“These flows have moved ahead of the occupational market, as is normally the case, and look likely to continue that trend when the full-year results are in for 2014.”

The IPD Global Property Fund index measures quarterly direct market performance across several countries, including those in Continental Europe. Peter Hobbs, head of real estate research at MSCI, explains that the European data for the second quarter of 2014 shows there has been some volatility.

He says: “The results suggest that the UK and southern European markets have been the most volatile over the past seven years, but with markedly different patterns of performance.

“The UK suffered the most, but also recovered strongly through 2010 given the strong weight of capital seeking to invest in that market. Performance then slowed but there has been a renewed surge in performance over the past year, driven again by the strong weight of recovery and some rental improvement.”

Mr Hobbs continues: “Southern Europe also suffered through the downturn and, although returns briefly turned positive at the end of 2010, they have mostly been negative over the past seven years.”

That said, he highlights the German and French property markets as having been far more resilient during the financial crisis and then continuing to perform relatively strongly since 2010.

“More recently, it is the German market that has seen the strongest performance, rising by more than 9 per cent in the year to the second quarter of 2014, compared with 5.5 per cent for the preceding year,” he adds.

Meanwhile, France has experienced a mixed few years, recovering in 2010, only to experience slowing performance, down to 5.1 per cent over the past year, according to IPD.

Mr Hook says that, in line with increasing transaction volumes, yields are tightening across most European geographies and sectors, as demand for prime assets rises.

He reasons: “In spite of this, real estate pricing remains attractive relative to most other asset classes, particularly as sovereign bond yields remain close to their historical lows.

“We remain positive about prospects for the region, and are forecasting total returns of 7 per cent per annum for Europe ex-UK property over the 2014-19 period.”

Some of the latest data to come out of the eurozone is prompting fears of a recession in the region, with inflation of just 0.3 per cent in September well below the European Central Bank’s 2 per cent target.

Says Mr Hook: “Given the risk that Europe could experience a further period of economic weakness, prime assets retain appeal and are likely to be increasingly valued by investors for their defensive characteristics.”

Ellie Duncan is deputy features editor at Investment Adviser

KEY FIGURES

7%

Total returns for Europe ex-UK property forecast over 2014-19

5.1%

Performance of the French real estate sector over the past year

9%

Rise in the performance of German real estate in the year to the second quarter of 2014