Last year was a period of strong outperformance for the European listed real estate market. Despite concerns over the sovereign debt crisis, an uncertain economy and geopolitical unrest, listed real estate gained a very respectable 14.4 per cent.
Performance of fund vs sector over 1-yr
Source: Financial Express Analytics
We expect further progress to be made in 2011, particularly now that we are moving into a new phase in the market. As the European economy has stabilised, investors have responded positively.
Pockets of growth in the property market have emerged, which are providing exciting new opportunities for capital growth, as well as income.
By far and away, the strongest market at the moment is central London. According to CB Richard Ellis, the capital was the most active city for real estate investment last year, capturing 27 per cent of all cross-regional investment.
Global demand and strong rental growth boosted property values in London during 2010. Standard retail property in central London increased in value by 11.6 per cent over the year, while offices in the City and the West End increased by 17.9 per cent and 15.5 per cent respectively.
Central London, and offices in particular, faced the worst of the decline during the downturn, which is now providing investors with plenty of upside potential for rents and capital values. Supply is restricted in the capital, with little opportunity for expansion, and this is also good for rents.
Meanwhile, international investors continue to be keen buyers in London. Some of our key UK real estate holdings, such as Great Portland Estates and Derwent London, are focused on offices in central London and have benefitted from the upturn in this sector.
Great Portland Estates saw a 3.2 per cent increase in the value of its properties during the final quarter of 2010, mainly driven by higher rental values. It has also reduced its void rate to 3.3 per cent.
While Scandinavian stocks were the hot topic on the continent last year, this has cooled in recent months. Swedish stocks in particular were the strongest performers in 2010. These are well-run companies, which continue to perform, but they are now looking expensive on a relative basis.
They are also more likely to feel the effects of future interest rate rises, given their use of floating rate debt. As such, we reduced our weighting in the likes of Fabege and Wihlborgs Fastigheter towards the end of last year.
Germany, on the other hand, is proving a more exciting play in the current market. With the nation’s economy growing by an impressive 3.6 per cent in 2010, it posted its best performance since reunification in 1990.
The German property sector is attracting investor interest at the moment, with a number of companies – particularly those in the residential sector – trading at a discount to NAV. The residential sector was largely sold-off during the downturn, but shares are now looking cheap and investors have returned in the hunt for recovery opportunities.
TAG Immobilien is a German residential stock that we hold in our portfolio. The company has a dynamic chief executive, Rolf Elgeti, who managed to reduce the vacancy rate in the portfolio by 10.7 per cent in 2010. There is scope for the stock to make similar progress in 2011.
While pockets of growth certainly exist, there are still areas of the market that investors continue to shun. Victims of the sovereign debt crisis, namely Greece and Ireland, continue to be weak. But the mood towards economic growth is definitely changing and it is an exciting time to be in the European listed market.
Vicky Watson is investment director of European Equities at SWIP and fund manager of the SWIP European Real Estate fund. The views expressed here are her own.