This is a positive operating environment for most areas of pan-European real estate. There are currently increasing political and economic challenges across all investment markets – interest rates remain at record low levels and are set to remain so for a prolonged period – however, the major European property companies are the clear beneficiaries of low rates as they can tap the bond markets for unprecedented fixed low cost and long-term finance. With the exception of retail and certain areas of the London office market, the outlook for rental sustainability and, indeed growth, across the pan-European real estate universe, is bright. 
The fundamental of structurally low supply against ongoing demand is set to come through in healthy income-driven returns over the medium term. The key reason behind this income sustainability and the length of this real estate cycle is the lack of new development supply.
The positive knock-on effect of the last property crash has meant increasingly stringent bank lending regulations to commercial real estate developments. This limited development finance, combined with a perennial uncertain economic outlook across European economies over the last decade, has seen very limited speculative development schemes.
This limited supply is not meeting the structural demand in most areas of our investment universe, which underwrites our confidence on the outlook for rents, and thus the key fundamental income attraction of the sector today.
German residential
Our case for German residential property investment is based on the key fundamentals of low supply, high demand and healthy affordability.
The lack of new supply has put upward pressure on rents in recent years, as demand rises from increasing household formations and net migration to urban locations. The demand has been particularly high in Berlin and when the left-wing social democrat-led Berlin senate announced a proposal to freeze all Berlin rents for five years, this shocked the market. With further restriction on rental growth, the development appraisals would be brought to a halt, extenuating the demand/supply mismatch and in the long term extenuate the upward rental pressure. Despite this political pressure, we expect values to be further supported by the current negative German bund yields.
Offices
Our office exposure is predominantly in leading capital cities, such as Paris, Stockholm, London, Madrid, Berlin and Dublin. In these high growth areas, corporates increasingly recognise the need to provide modern spaces, with good transport links and energy ratings, in order to attract the leading creative employees.
Development of such space has been limited in most of these markets for development constraint reasons, and therefore the ongoing tenant demand in these cities has not been met by the expected spike in developments.
Grade A vacancy is therefore at very low levels, ensuring pricing power remains with the landlord and we are seeing good rental income growth with the exception of London where rents are flatlining with Brexit uncertainty. Investment demand is strong for such assets, and we are biased towards management teams who can create this space, principally through re-development.
Retail
Retail is going through a major structural revolution, particularly in the UK where there is too much retail space and where rents are too high for retailers’ multi-channel retailing requirements.
Capital values across most UK retail have already corrected materially and have further falls to come to attract buyers, but the quoted sector has materially priced such moves in, with shares trading at deep discounts to current asset values.
In the UK, we are selectively invested in London retail, convenience and value retail and prime destination shopping centres.
On the continent, we are focused on the leading destination centres, predominantly in European cities, and expect these to perform much better than the UK. We believe this sector is highly vulnerable to corporate action, given the implied yields at current share prices.
Industrial
In contrast to retail, the industrial sub-sector is the key beneficiary of the growth in online retail, with retailers and logistics companies requiring both big box logistics and urban warehouses to meet the rapid delivery requirements of the consumer.
We are particularly positive on the urban warehouse market, where this increased demand can’t currently be met by supply, with these smaller sheds still typically valued below replacement cost and residential schemes still preferred on potential sites, both by developers and planners.
Alex Ross is manager of the Pan-European Property Share fund. The views expressed above are his own and should not be taken as investment advice.