As Europe moves towards the end of the property cycle it is more important than ever to select the right location for investment. In our opinion, Berlin still provides the best combination of potential growth and protection against an end of cycle downturn. Below we compare the German capital with two other cities which are garnering a lot of investor attention, Dublin and Lisbon.
Nowhere else in Europe is the real estate market underpinned by such strong fundamentals than Berlin. The German capital has been the fastest growing property market in Europe for the past ten years, but it remains the top choice for investors looking for safety and high growth potential.
Unlike much of Europe, Germany’s property market was largely unaffected by the 2007-8 financial crisis. This makes Berlin the perfect investment destination as we near the end of the current cycle.
Although prices in Berlin have risen by over 100% in the last ten years there remains plenty of room for growth. Prices in Berlin are 40% below Munich and 50% below Paris.
There are many drivers of growth in Berlin which create an excellent long-term future for investors. It has a growing and dynamic economy and as a result, is home to the highest number of start-up companies in Europe. The population has recently been rising by over 40,000 residents per year, in contrast only 10,000 new residential units are completed annually. Consequently, there is now a housing shortage. A market with high demand and low supply creates rising prices. Regulations put in place by the government ensure sustainable growth and help to prevent against a real estate bubble.
The strong fundamentals driving growth, coupled with how undervalued this market is compared to other cities, provide stability of scale that cannot be matched elsewhere in Europe, perhaps even in the World.
Ireland was the fastest growing economy in Europe in 2018 for the fourth year in a row. The capital city, Dublin, is drawing a lot of attention from investors.
Dublin is the silicon docks of Europe. The city is home to many major technology companies including Google, Facebook and LinkedIn.
The Irish capital is a natural relocation point for British companies in a post-Brexit world, particularly for those in the financial industry. As a result, there has been a lot of commercial real estate activity in the past two years.
Despite positive signs, there are also risks to the growth in this market. The annual growth of capital and income from property has fallen every year since 2014. This could be a signal that the market is already entering a downturn. A lot of investment has come from Asia and as financing becomes more difficult to obtain these investors may look for other markets.
Finally, while Brexit has had a positive effect on Ireland it also brings risks. Issues over how to solve the ‘Northern Irish backstop‘ problem and a potential hard border could reignite political tensions in the country.
In 2019, Lisbon was ranked as the number one investment destination by PWC in its Emerging Trends in Real Estate Europe Report.
The city has a thriving service and out-sourcing industry due to the relatively low cost of labour and living. As a result, there is an under-supply of commercial real estate despite investment and development in recent years.
Many are tipping the Portuguese capital to be one of the best-performing markets in Europe over the next few years.
However, many experts question whether the growth in Lisbon is built on strong fundamentals. A certain proportion of the gains can be attributed to the so-called ‘golden visa program’. This program offers permanent residency for non-Europeans that invest €500,000 or more or create ten jobs in Portugal.
Similar schemes in other countries have proven to over-inflate real estate values. Critics say investors are more concerned about reaching the qualification limit than buying assets which are good value or a fair market price.
Nowhere is the growth in Lisbon more concerning than the comparison between average rents and average wages. Currently, the average monthly wage in Lisbon is €902, while the average monthly rent for a one-bedroom city centre apartment is €880. Certainly it is not sustainable for people to pay nearly 100% of their salary on rents.
The Portuguese economy also faces potential challenges now that the ECB has ended their quantitative easing plan. Not only does this signal potential interest rate rises, which will impact mortgage interest rates, it also means Portugal must fund themselves in capital markets. If the interest rate that the Portuguese government must offer on their debt to entice investors is too high it will be untenable. Consequently, this could cause severe economic issues and impact the real estate market.
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