The performance of luxury residential markets across Europe’s key cities has been disparate and patchy since the financial crisis took hold in 2008 but Knight Frank’s inaugural European Cities Review shows that in Madrid and Dublin the recovery has been marked.
The report says that Madrid and Dublin recorded price growth of 5% and 24.6% respectively in the year to March 2014.
The report also says that Paris is increasingly good value compared with other Tier 1 cities in Europe and foreign buyers account for the largest component of demand in top wealthy locations Monaco and Venice.
‘However, even amongst Europe’s first tier cities there is considerable disparity. With luxury prices in Paris oscillating around €12,000 to €15,000 per square meter, property here is looking good value, especially when compared to London or Monaco where prime prices are closer to €30,000 or €55,000 per square meter respectively,’ said Kate Everett-Allen, head of international research at Knight Frank.
Much has been made of wealthy overseas buyers putting their money into property in London but the report suggests that as economic indicators improve, the safe haven effect may not be uppermost in luxury buyers’ minds. Instead, lifestyle, proximity to schools or universities and security considerations may be increasingly influential.
It points out that geopolitical tensions around the world will continue to push wealth buyers across borders. Similarly, changes to immigration laws in Switzerland, the fluctuation of tax rates in France and the introduction of Golden Investor Visas in Spain and Portugal can lead to short term changes in buyer sentiment.
‘The performance of prime property is still influenced by the pattern of capital flows and the priorities of the world’s wealthy. In most cases, prime prices in Europe’s cities proved better insulated than the continent’s rural and coastal second homes in the period since 2008,’ explained Everett-Allen.
‘Prime city markets rely on a broader platform of demand; a mix of domestic owner occupiers, institutional investors, private wealth and foreign second home buyers. This mix of buyers meant that when foreign buyers retreated from the market in 2008/2009 there was a still a level of sales activity, albeit limited, taking place in Europe’s cities,’ she added.
But she pointed out that’s not to say prime city markets did not see significant price falls. For example, Dublin and Madrid saw falls of 45 to 55% peak to trough and even London saw prices decline by 24% in the year to March 2009. Vienna is the only exception and prices remained static in the aftermath of Lehman’s collapse and have seen growth of 5% per annum since 2012.
Paris experienced a brief growth spurt, with prices rising 22% in the year to September 2011 as wealth from the Middle East sheltered in the French capital as the tensions surrounding the Arab Spring heightened.
The report also says that six years of slow sales activity means the choice and availability of prime homes is at its best for several years. However, while London’s prime development pipeline is relatively strong there is little planned or under construction in many of Europe’s historic and high density cities such as Paris, Monaco and Vienna.
‘If market activity strengthens and only limited new supply is added, the luxury stock that is on the market may take two to three years to be absorbed, with the potential for further price growth thereafter,’ said Everett-Allen. ‘It is likely that Rome, Barcelona and possibly Paris will join Dublin and Madrid as growth markets in 2014,’ she added.
She also explained that the profile of luxury buyers is expected to change. ‘Private wealthy individuals will still comprise a significant component of demand in Europe’s cities but family offices, sovereign wealth funds and private investors will increasingly compete for the best properties. Growing interest from institutional investors, such as pension funds, hedge funds and insurance companies, is already evident in Barcelona, Madrid and Dublin,’ Everett-Allen also explained.
It is also possible that investors may start to look at rental returns and gross yields rather than focusing solely on capital appreciation and the key to attracting the world’s rich will be accessibility and infrastructure.
‘New flight routes or the introduction of a winter timetable from key buyer destinations can be sufficient to have a significant impact on demand levels. Although wealth creation is forecast to be strongest in emerging markets in Asia and Latin America, the appeal of Europe’s luxury bricks and mortar will, due to its history, diverse cultures, architecture and climate, mean it will remain the location of choice for the world’s wealthy,’ concluded Everett-Allen.
