London and Paris still dominate wish list of European real estate investors

European real estate investors are increasingly looking beyond London and Europe’s gateway cities such as London and Paris as they seek to meet their return objectives, new research suggests.

But not every regional city is suitable for investors and returns can disappoint in the medium term if one does not factor-in local market fundamentals such as local growth trends, demographic changes and human capital, it points out.

According to the latest LaSalle Investment Management’s European Regional Growth Index (E-REGI), which ranks Europe’s top 100 cities, the region’s economy is driven by dynamic urban centres with London and Paris once again in first and second position in the ranking.

The index report explains that the extraordinary resilience of such cities, combined with their deep investment markets, justifies targeting them for a wide range of investment strategies. Other cities increasingly coming to the fore include Manchester at 17 and Bristol at 25 which have both climbed three spots in the European ranking, while Birmingham at 37 is up two spots.
‘Having published this index for 16 years, we now have an unrivalled understanding of the different economic patterns in Europe’s leading cities,’ said Mahdi Mokrane, LaSalle Investment Management’s head of research and strategy for Europe.

‘The index not only determines which real estate markets are likely to out or underperform in the medium term, but combined with our on the ground expertise we also use the index as a strategic framework to match cities with the most relevant investment styles,’ he explained.

In order to help investors navigate the complexity of the different strategies which best match different cities, LaSalle has categorised them into four distinct groups: consistent, affluent, mover and aspiring.

Consistent is the largest group in the E-REGI analysis. Cities in this group are generally sizeable and combine deep investment markets with long term economic strengths related to demographics, technology and urbanisation (DTU), creating the right conditions for growth focused strategies.

London and Paris top this group of consistent performers, but balanced E-REGI scores and consistent performance over time are not limited to the top of the ranking. Munich, Frankfurt, Hamburg, Stuttgart and Amsterdam also seem suited for value-add or opportunistic strategies. Düsseldorf, Mannheim-Karlsruhe, Cologne-Bonn, Rotterdam-The Hague, Utrecht, Edinburgh and Leeds are also included in the group but the report says core investment would be more suited given their smaller market size.

Affluent is a small group of cities that also support long term strategies but are more difficult to transact-in due to their smaller size and stronger domestic investor base. Consumer related strategies are most attractive in these cities as their strong E-REGI scores are predominantly driven by their wealth and research and development spending components. This group includes Stockholm, Luxemburg, Oslo, Copenhagen-Malmo and Zürich.

Movers are more ‘cynical’ market where timing is of the essence for investment in these more cyclical markets. For example Spanish cities have seen moves at both the top and the bottom of the ranking. Madrid and Barcelona were the strongest improving markets in 2014, now joined by Bilbao and Valencia. A small number of cities, notably Berlin, Leipzig-Dresden, Manchester, Birmingham, Bristol, Toulouse and Bordeaux, are what LaSalle calls ‘structural movers’ in the E-REGI over time. Overriding year on year fluctuations, this sub-group of cities are experiencing an upward trend in their score, providing them with outperformance potential.

Aspiring markets are those that are receiving increased attention from investors seeking enhanced returns, Istanbul retains E-REGI’s number three spot and tops a category of cities whose scores are driven by strong growth performance and outlook. Izmir and Ankara are solid contenders and will become more attractive for international investors as real estate markets grow and transparency improves. The aspiring cities of Warsaw and Prague will continue to benefit from balanced economies and progressive policies, leading to increased growth and investment activity.
‘We believe this new framework can help investors think more clearly about where to direct their capital. These economic growth areas bring together a rich array of investment opportunities and most importantly are underpinned by the best fundamentals across the continent,’ said Anne Koeman-Sharapova, co-author of the report at LaSalle Investment Management.