EUROPEAN property funds have proved a worthwhile investment in recent years, with many people who have done well in UK property deciding to diversify overseas.
Only this week, Standard Life Investments (SLI) – the 11th-largest property investor in the world – said it would target fast-growing office markets in continental Europe and Asia after seeing something of a cooling of the commercial property boom in the UK.
SLI has just made its first direct investment in the Polish property market in a joint venture with Panattoni Development Company. They are developing a 50,000sqm distribution warehouse facility in the city of Lodz.
Andrew Jackson, manager of the SLI’s Select Property Fund, said: “We believe central European logistical property offers exciting prospects for the future. These markets are ideally placed for two main reasons – they provide logistical operators with an axis to transport goods from manufacturing bases in central and eastern Europe to western Europe, and serve as a distribution platform for goods traded between northern and southern Europe.”
There are several reasons behind the success of European property funds in recent times. For example, the favourable development of commercial property and the introduction of the special Real Estate Investment Trust (REIT) status have fanned investor demand for property funds.
And Seven Dials, a fund manager and commercial property analyst, expects the European property sector to show continued improvement in 2007.
As analysts downgrade investment returns from the over-ripe UK market, Seven Dials highlights the “Euro-factors” underpinning this fast growing asset class.
“While Euro-zone economies have lagged the UK’s domestic growth, all the signs are that Europe has far more upside growth potential than the UK,” said Seven Dials chief executive Brett Robinson.
“Supportive conditions for domestic demand remain in European economies and they are generally less reliant on US trade than they have been in the past, which will leave their territories better shielded from downside risk than the UK.”
But some people are questioning whether this strong European growth can continue.
Astrid Smit, head of the investment strategy team at ABN AMRO Asset Management in Amsterdam, said: “The big question, of course, is: how interesting is property still as an investment? Our view is that interest rates are set to stay relatively low and that high income, and hence property, will continue to attract strong interest.
“The environment for property remains very strong, but current valuations leave less scope for a recurrence of the exceptional returns seen in the past few years.”
And Robinson warns that, in order to generate positive returns in European property above those on offer in the UK, investors must be selective in terms of markets and sectors, as well as being mindful of careful stock selection.
He said: “At a sector level, we favour retail and industrial over the office sector – they are better placed to pick up from euro-zone domestic demand, and aren’t as keenly priced.”
Seven Dials is also particularly keen on the Nordic region and the Netherlands, where it anticipates robust domestically-driven growth through 2007 and beyond.
Opportunities are undoubtedly growing for people to invest in this sector – for example, towards the end of last year two European property funds undertook initial public offerings (IPOs).
One was Rutley European Property Limited (REPL), a commercial real estate investment company owned by Knight Frank LLP. Nicholas Burnell, of Rutley Capital Partners, said: “An issue with Europe is how do you find the right properties and manage them well. We have 20 offices across Europe which gives us traction on the ground which some of the competition don’t have.
“We set-up a fund that was focusing on key commercial assets, such as offices, retail and industrial warehouses. We’ve bought principally in Germany, Poland and are working on deals in the Czech Republic and Belgium. We’re now looking at such locations as Romania and Hungary.”
But investors should realise that Europe is less transparent and has a more fragmented infrastructure than the UK so it is vital to find an investment manager who knows the market.
The Invista European Real Estate Trust – majority owned by HBOS – also undertook an IPO and listed on the London Stock Exchange.
Tony Smedley, of Invista Real Estate Investment Management, said: “We felt the portfolio was well-balanced and sufficiently diversified to bring it to market. We see a lot of opportunities in second and third tier cities such as Lyon and Frankfurt.
“Basically, we’ll look for value wherever it exists and move from country to country to exploit the opportunities. We’ve focused our energies on more liquid, transparent markets in western Europe. We’d also quite like to invest in Scandinavia and perhaps Italy.”
For the more adventurous investors, 2007 could also be a good year to look ever further afield to markets such as Asia, although it is important to do your research before taking the plunge.
Peter Bickley, director of economics at Tilney Investment Management, said: “Growth rates are relatively high in Asia and the association with China will ensure enduring growth even if the western economies stumble.”
For people wary of more distant economies, there are still opportunities in Europe if you find a manger who can snap up properties off-market to avoid the need for competitive bidding in some of the smaller regional cities.
While property investment may not deliver the sparkling returns of recent years, and equities continue to recover, commercial bricks and mortar should not be overlooked.