Beyond the headwinds: disruption, demographic change and driving returns in 2019
For investors, waters look choppy in 2019. Brexit, the spectre of a trade war between the US and China, interest rate rises, and equity market volatility are spurring investors to chart a safer course to protect and enhance returns.
Against the backdrop of uncertainty and low bond yields, European real estate is an attractive proposition. But while there are good returns to be had, managers need to plan their strategies carefully. So, where are the opportunities?
While Brexit has brought uncertainty, there is value that can be created through the dislocation of Brexit impact. A way we’re looking at achieving this is repositioning assets “from poor, to core” – taking advantage of the weaker pound to invest in low cost assets and apply asset management strategies that generate income. Carefully selecting the right assets is fundamental to this, as a good asset in the right location can always be repositioned
A second major area of opportunity is in demographic change across Europe as millennials drive trends in the way we use and think about space. The ways millennials work, play and stay are shifting how we sweat our assets: from flexible working spaces, to app-controlled hotels and a hunger for pop-ups and instagrammable spaces, such as rooftops.
We therefore see substantial opportunities across core European cities with burgeoning younger populations, like London, Berlin and Lisbon, two of which have been highlighted as the top cities for overall investment and development in PWC’s Emerging Trends 2019 report.
Hotels are a good example of a vibrant sector which was once seen as an alternative, is very much so a mainstream sector, which taps into the growth of middle-class and millennial travellers’ thirst for experiences. Cities with a growing economy and younger population are an exciting proposition for hotel investors as they attract increasing numbers of business and leisure travellers.
So, despite the obvious uncertainties, there is plenty of opportunity for investors in 2019 and looking even further ahead capital will continue to flow into Europe, with investors increasing allocation to real estate by 54% over the next 5 years according to recent data from Preqin. Economic and demographic change in Europe present lucrative opportunities which, if accurately selected, can help investors navigate the risks of political uncertainty and market headwinds. In our view, robust investment strategies taking into account emerging trends and sector disruption, supported by investors locking in cheap debt at a low LTV will win out in the medium term.
While at times the outlook can be bleak, there is good news on the horizon for innovative European real estate investors and managers.