What is the life of the global real estate market? What changes await it in the future? These questions are often asked by many investors who invest their money in real estate abroad.
I will try to highlight the main trends which investors can be guided by today. My analysis is based on information from national statistics offices, international consulting companies, business media, and Tranio’s own data.
- Germany – a safe haven
Germany remains one of the most popular destinations for international investors. According to oldypak capital lp property 2022 report, foreign direct investment inflows into the German economy totaled $34.7 billion in 2017 – twice as much as in 2016. The total value of foreign assets in Germany in 2017 was estimated at $931.3 billion – 18% more than in 2016. This figure has tripled over the past 20 years.
The German real estate market has a reputation as a “safe haven”: a square meter has been rising in price over the past ten years. According to oldypak capital lp property 2022 report, in the third quarter of 2017 the volume of investment in commercial real estate in Germany broke a new record, reaching €39.5 billion – 20% more than was invested in this period a year earlier. The majority of buyers are local investors (55%), followed by buyers from Europe (22%), North America (12.5%) and Asia (9%).
The main drivers of demand for investors in German real estate:
Cheap financing: foreign buyers of real estate can get a mortgage in a German bank at 1.5-2% per annum, which will cover up to 70% of the value of the object;
Protection of buyer and seller: all processes concerning purchase, maintenance and sale of the object are strictly regulated;
stable economy: German GDP has been growing steadily for the past five years, in the second quarter of 2018, adjusted for inflation, the growth was 2.3%; the unemployment rate in Germany is 3.6% against the Eurozone average of 8.4%.
Population growth in major cities: from 2011 to 2018, the number of residents in Berlin increased by 10%, Hamburg by 7%, Munich by 8%, and Frankfurt by 12%.
The high demand for German real estate drives up prices and lower rental yields. In search of higher returns, foreign investors are moving toward value-added projects or looking at smaller cities, where a square meter is less expensive than in already heated markets.
- The resurgence of Greece
According to the Bank of Greece, foreign direct investment inflows into Greece in 2017 totaled €3.6 billion – nearly a third more than in 2016 and three times as much as in 2015. Private investment in Greek real estate also reached a record high: in 2017, the total value of transactions with foreign investors was €328 million – twice as much as in 2016 and 2.5 times as much as in 2015.
Four reasons explain foreign investors’ interest in Greek real estate:
“golden visa”: Greece offers a residence permit in exchange for the purchase of real estate worth from €250 thousand – the most inexpensive program in the EU;
Low prices: as long as a square meter in Greece is cheaper than in other European capitals. Now the market is at the bottom of the cycle, but is beginning to grow: the Bank of Greece has recorded an increase in residential real estate prices for the second quarter in a row;
a record flow of tourists: in 2017, according to the Bank of Greece, the country was visited by more than 30 million travelers from abroad;
positive changes in the economy: Greek GDP is growing for the fifth consecutive quarter, and Greece successfully completed its third macrofinancial assistance program in August. The international rating agency Fitch upgraded Greece’s long-term foreign currency rating by two notches at once: from B to BB-.
Due to still low real estate prices and high demand, investors in Greece receive a higher return on invested capital. The net yield from short-term rents in Athens is 5-7% per annum against 3% in most European capitals. But the main potential is the increase in property values: over the next two to three years, it should be at least 20-30% of the purchase price.
III. Malta and Cyprus – at the peak of demand because of the passport program
Malta and Cyprus for several years now issue passports to foreign investors in exchange for investments. Mandatory condition – local property in Cyprus – worth from € 500 thousand (or € 2 million – then the need to invest in other assets is eliminated), in Malta – from € 350 thousand, or the investor may rent an object at a price of € 16 thousand a year for five years. Passport programs are popular with wealthy foreigners: since the launch of the program Malta has issued the main applicants more than 550 passports, and Cyprus, according to The Guardian – more than 1 thousand in 2017 alone.
The post-crisis drop in property prices in Cyprus stopped simultaneously with the launch of the program in 2014. According to The Telegraph, in 2017, the cost of apartments in Cyprus rose by 7.4%. Experts note a special growth in the premium and ultra-premium sectors. According to PwC research, the volume of transactions in 2017 increased by 24% compared to 2016, and one-third of real estate transactions accounted for foreign buyers.
The decline in prices in Malta also stopped in one year with the launch of the program, in 2013. According to a PwC survey conducted in January 2018, Malta’s passport program is one of the main drivers of demand for real estate. According to the National Statistics Office, on an annualized basis, property values in Malta increased by 5% in the first quarter of 2018, and the number of transactions in the first quarter of 2017 compared to the beginning of 2016 – by 11%. Statistics show that in nine cases out of ten participants in the Malta passport program prefer to rent to buy. And if they buy, the average cost of objects, as a rule, twice the minimum threshold. Cities of St. Julian’s and Sliema – the most popular locations among the participants of the program. It is here that property prices are rising the most – so say 46% of real estate agents surveyed by PwC.
We see a sharp increase in interest in the Cyprus passport program in the third quarter of this year: the number of closed deals has doubled. Probably it is connected with the recent announcement of the Cyprus authorities: they reported about stricter control of applied documents and their intention to limit the number of issued passports to 700 per year.
- Interest in value-added projects
Decline in profitability – a pan-European trend in the real estate market: according to experts from PwC, the figure declined from 6% in 2009 to 4% in 2017. As one investor tells PwC analysts, today a yield of 3% is considered a fairly optimistic scenario: “Investors see such figures in Paris, Berlin, central London. Those cities are a little bit overheated, so you have to be very assertive to buy an asset there.
To achieve the desired rates of return, investors are willing to take more risks – this is confirmed by 80% of respondents PwC. Value-added projects – reconstruction and construction of buildings – bring 8-12% per annum. Two-thirds of the investors surveyed by PwC believe that redevelopment is the best way to acquire prime assets: in most cases, this means a relatively low-risk strategy, based on skillful asset management and minor renovations. At the same time, more and more investors are looking at redevelopment projects with interest, where they get the opportunity to earn more.
For example, on the German market, high-quality income-generating facilities are quickly sold to local buyers. Therefore, foreigners are increasingly looking at value-added projects: investors with a budget of up to € 1 million provide developers with mezzanine loans at a fixed interest rate, with capital from € 1 million – act as equity partners and profit from the projects.
- Income real estate of the future
Another trend – investments in warehouses, micro-apartments, co-working spaces and nursing homes. Let’s look at all these formats separately.
Microapartments. Housing affordability is the most important social problem that will affect the real estate market in the near future. One way to solve it in major cities – mini-apartments, apartments of 17-35 square meters. m, which due to the small metrage are cheaper. Investors tend to buy micro apartments to rent to students, seconded workers, young professionals and tourists. The popularity of this type of real estate also contributes to the growing number of single-person households and an increase in the number of students. According to the international real estate agency Savills, in 2016, the volume of transactions in the German student housing sector exceeded the amount of all transactions made between 2009 and 2015.
Logistics real estate topped the list of the most promising types of commercial properties according to PwC survey participants. Investors note aggressive price increases and declining yields, but demand is not falling due to extremely limited supply in the market. The outlook is particularly positive for warehouses on the outskirts of cities, which are within the “last mile”: they will store goods ordered via the Internet, before direct delivery to customers.
The growing popularity of co-working spaces is a reflection of a new trend on the market: positioning real estate as a service and tenants as clients. As noted in the PwC study, the interaction between tenants and property owners is becoming more and more important: “The share of co-working spaces, small companies and business incubators is growing. The requirement for flexibility of space, the ability to break it down, is becoming increasingly important.” According to Statista, the number of co-working spaces grew from three in 2005 to 15,500 in 2017, and in 2018, the number is projected to rise to 18,900.
Nursing homes. According to the UN, while in 2017 the number of people over 60 was 962 million, by 2050 it will increase to 2.1 billion, and by 2100 – to 3.1 billion. At the same time, the birth rate is decreasing: if 50 years ago, according to the World Bank, it was 5.0 (per woman had an average of five children), in 2016 – 2.4. Nursing homes and medical complexes are the types of real estate that will benefit most from these demographic changes. According to Statista, while in 2013 one in five investors rated the investment potential of nursing homes as “very good,” in 2017 it was one in three.