Potential for direct investments in Europe
November 28, 2024
Topics
The signs of an end to the correction phases in many major European cities indicate that now could be a good time to invest in office properties. In this context, we have examined 18 major European cities to identify which locations currently offer the best prospects.
In order to identify the most attractive investment locations in European cities, we have analyzed various key factors. These include market yields and rental price trends, vacancy rates, economic indicators such as the unemployment rate and inflation, the performance of indirect real estate investments and the current market sentiment (more details on the methodology below).
Different levels of real estate premiums
In particular, we have evaluated the current real estate premium compared to the average of the past 10 years in order to assess the attractiveness of real estate investments in a longterm context. We assume that the market in some cities may have overreacted due to the prevailing uncertainty, which now opens up interesting investment opportunities. This should become apparent when looking at the development of net initial yields compared to government bond yields.
Both the nominal and the real calculation method of the real estate premium are equally included in the analysis. The nominal real estate premium results from a comparison of the prime yields with the nominal yields on ten-year government bonds, which reflect the actual cash flows and are decisive for investors who plan their income and obligations in current monetary values. It therefore takes into account the interest rates as they are actually offered on the market.
The real property premium, on the other hand, results from a comparison of prime yields with government bond yields adjusted for the average inflation trend over the last five years. It is important in order to understand how much real estate premium is actually achieved after taking into account the loss of purchasing power in government bond yields.
According to the analysis, the current real estate premiums in the cities of Amsterdam, Vienna, Berlin, Munich, Dublin and Stockholm are above the average of the last 10 years following the sharp upward movements in net initial yields. This makes it clear that the yield premiums on real estate investments in these cities are currently particularly high compared to safe government bonds. The increased property premiums also indicate that the market in these cities may have overreacted, giving investors the opportunity to benefit from future market stabilization and value appreciation
Market sentiment is very diverse
Another indicator for assessing the investment attractiveness of major European cities was the analysis of texts published by various market players such as CBRE, C&W, JLL, PMA and Savills. These reports focus on the market prospects of the individual cities. The documents were analyzed using classical sentiment analysis techniques based on lexical methods and modern machine learning approaches, in particular by applying neural networks for language processing. The combination of the resulting sentiment values provides a comprehensive picture of market sentiment.
Although the values shown in the chart «Market sentiment in major European cities» cannot be interpreted numerically, they nevertheless clearly show in which markets the current assessment is more positive or more negative. According to this analysis, sentiment in Zurich, Geneva, Dublin, Amsterdam and Barcelona is currently comparatively good. In contrast, sentiment in Vienna, Milan, Berlin and Helsinki is subdued.
Overall, we examined 13 factors that fall into the areas of market yields and rental price trends, supply dynamics, economic conditions, real estate premiums and performance, and market sentiment. For each of these factors, we compared the 18 cities with each other and assigned them a value between 0 and 1 according to the concept of quantile ranking. For most indicators, but not all, this means: The higher the value, the better the city performs in this factor. We then added up the values of all factors for each city. The city with the highest total is ranked first.
Amsterdam – Rank 1
Amsterdam takes first place in our ranking of the most attractive office investment locations in Europe. The city impresses with a current real estate premium that is well above the average of recent years, which indicates particularly attractive yield premiums compared to government bonds. The generally positive market sentiment, confirmed by the sentiment index, reflects the confident attitude of investors towards the Amsterdam real estate market. In addition, the good performance of indirect real estate investments in the Netherlands underlines this attractiveness. A low unemployment rate indicates a robust local economy, which supports demand for office space. In addition, Amsterdam is experiencing above-average growth in prime rents, which holds out the prospect of potential yield increases for investors.
Munich – Rank 2
The current real estate premium is above the average of recent years due to the sharp corrections in initial yields following the interest rate turnaround, which points to attractive yield opportunities. The good performance of indirect real estate investments this year could be a sign that the general downward trend on the German real estate market has bottomed out. Munich is also benefiting from a low unemployment rate and above-average rent increases. The city has a low vacancy rate, even if it has recently increased slightly. However, the sentiment index still shows little confidence, which is an indication that the upturn still needs some time.
Manchester – Rank 3
The top properties in the office space segment are recording high net initial yields, offering investors attractive yield opportunities. The current real estate premium here is in line with the average of recent years. In addition, Manchester recently recorded a decline in the vacancy rate for office space, which could be due to increased demand. The sentiment index reflects a medium level of confidence; the confidence of market participants is stable.
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