Scanning for opportunities in European property market
Play
THE EUROPEAN economy is beginning to show signs of recovery, after a period of reeling, as a result of the use of quantitative easing (QE), with first-quarter expansion of 0.4 per cent surpassing the 0.3 per cent seen in last year's final quarter.
Investors looking to gain from this European return, apart from aiming at European stocks, should also consider Europe’s property market, either in terms of physical property or real estate, because property prices normally grow along with economic growth.
Such can be seen from the sub-prime crisis in 2008 that caused US property prices to take a plunge of more than 30 per cent, which was later felt in economies around the world. The success of QE in the US, however, brought the US economy back, and thus US property prices, too.
The European Union, which has faced a Greek debt crisis since 2011, introduced QE through its central bank this year, stimulating its economy back to life, though still trailing that of the US. European property is also rebounding, as reflected in increasing prices of property stocks, although again still trailing those in the US.
A recovery in European property has been visible for the past two to three years. Lease rates are rising and vacancy rates are not deteriorating. It is interesting to invest in this European property for its constancy of return comparable to that of bonds, yet with higher rates. Plus, property is less volatile than stock investment.
All these factors are not to mention the growing trend in European lease prices and inflation that might further boost the said prices, especially in prime areas such as London, which could see a 10-per-cent increase in office-rent prices, or Frankfurt, which expects a rise of 4 to 6 per cent.
All this is the result of faith in the recovering economy, and limited supply. On top of this, the European property market is deemed to be highly transparent, which further boosts the credibility of the market.
Besides, lower European interest rates benefit property developers there in that their costs would be lower. Normally, the financing in a property development project is 60 per cent the developer’s capital and 40 per cent from creditors. Lower costs resulting from lower interest rates are reflected in a higher return on equity.
This way, financially stable companies can increase the amount of the loans they take on to rent more land and property, and enhance their possibility to merge with other businesses.
European interest rates are expected to remain low for some time. Compared to US rates, which are expected to be raised this year, European ones are going to continue boosting property-sector growth.
Investing in European property requires some expertise in opting for the right theme, such as property in prime areas where fewer new property schemes can materialise; property benefiting from demographic change (increase of middle class or elderly); or property companies gaining from leverage.
However, investment in property is associated with a level of risk, in that the property prices have increased for some time and any surge in interest rates will send prices into a tailspin, at least for a short time.
Investors able to take the risks entailed in foreign stocks and property, but who do not have direct access to European property or do not have expertise in investing, may approach mutual funds that focus on property investment and European property stocks.
This article was contributed by Asset Plus Fund Management Co Ltd
