In its latest annual European Regional Economic Growth Index (‘E-REGI’), LaSalle Investment Management reveals that medium-term demand for European real estate will remain highest in large city regions, as well as cities that boast strong fundamentals and high levels of wealth such as London, Paris and Munich.
However, economic strains are taking their toll on Western Europe. London has slipped to second place in 2011 due to a reversal of last year’s gains in GDP and employment growth as well as renewed global financial concerns, which have indirectly impacted the UK’s capital. However, the city’s wealth and business environment scores still far exceed those of Moscow, which leads the E-REGI rankings on the basis of its growth potential.
Simon Marrison, European CEO, LaSalle Investment Management said: “The polarization in Europe is the strongest since before the adoption of the single euro currency. The competitive economies of the Nordics, Germany and emerging eastern European markets are forecasted to fare relatively well over the next few years, while the highly-indebted southern European and certain emerging markets are likely to lag.
“Despite losing its top spot, London is a mature, dynamic and resilient economy which continues to set the pace for the rest of Western Europe. The 2012 Olympic Games will provide a welcome boost through job opportunities, local regeneration and by aiding the hospitality industry.”
After climbing from 10th to second place in last year’s E-REGI, Moscow has topped the table this year, demonstrating the importance of size and economic growth to a city’s investment potential. Yet, LaSalle believes that a negative business environment score will continue to deter foreign businesses and investors.
Munich has retained its 2010 position of third place and remains ahead of Paris due to its marginally higher growth and business environment score, despite having a slightly lower level of wealth. Germany is also the country with the highest number of city regions in the top 20 (five), highlighting its relative economic strength, as well as the accelerating polarization between strong and weak European economies.
Turkey sits alongside Russia as a sizeable emerging economy, which is reflected in Istanbul’s surge from 25th to fifth place in the E-REGI rankings. The city is quickly establishing itself as a regional financial center, whilst the rest of the country is also seeing the benefits of exceptionally high growth.
Alistair Seaton, European Strategist, LaSalle Investment Management and the report’s author said, “There were clear signs of a slowdown in Europe’s real estate economy during the first half of 2011, coupled with growing uncertainty surrounding sovereign debt. The debt crisis in Europe has entered a new phase, particularly in terms of fiscal integration and the single currency. The next few months will be crucial.
“The E-REGI provides guidance as to what can be expected of the European property markets, identifying the cities that look set to provide the best medium-term prospects for occupier demand. As Europe is recovering from a severe crisis and now faces new challenges, dynamic economies such as London and Paris, perform more strongly while less competitive locations, in otherwise robust countries, fall behind.”
In Q2 2011, direct commercial real estate investment in Europe totaled €25 billion, representing a 6% decrease on Q1 2011 (€26.5 billion) but 4% growth year-on-year. The increase in investment volumes in Turkey and Russia demonstrates that some investors seeking higher returns remain deterred by pricing of prime assets and are therefore looking into alternative markets with more growth potential in preference to weak, secondary markets in established economies.
Russia is one of the few countries to have gained from high energy prices, although a reliance on oil prices adds significant volatility. With parliamentary and presidential elections approaching, further transfers and fiscal stimuli are expected to boost household income and consumption. The crucial issue going forward is to restore confidence amongst foreign investors still wary of investing in Russia.
Moscow’s growth potential and size makes it stand apart from the other cities, but potential growth by itself is not enough to earmark a city as a potential investment target market. All Russian cities received a negative business environment score primarily due to the lack of transparency and uncertainties around how foreign businesses can operate effectively: Yekaterinburg (49/+28), Nizhny Novgorod (50/-1) and St. Petersburg (95+2).
The UK continues to be the most polarized on the Western European economies. London is the only UK city ranked in the top 20, while all the other cities are mainly placed in the bottom half of the table. Regional competitiveness is even more important now than before the recession, as weaker cities cannot rely anymore on a robust national economy to sustain their growth.
However, most UK regional cities did gain some ground on 2010: Edinburgh (29/+30), Manchester (35/+1), Leeds (53/+21), Birmingham (59/-1), Nottingham-Derby (61/-16), Newcastle (72/+8), Sheffield (86/+9) and Liverpool (96/-2).
Despite a sharp fall in economic growth, Germany is still expected to outperform the euro zone over the medium term and to repeat its strong growth of last year. Munich retains its third place in 2011 with the city benefiting from several strong global companies and a diverse range of SMEs offering opportunities in many industries, e.g. electronics, cars, manufacturing, insurance and the financial sectors.
The overall positive outlook is reflected in the fact that five German cities are currently ranked in the top 20: Stuttgart (10/+3), Mannheim-Karlsruhe (15/+2), Frankfurt (17/+3) and Hamburg (19/+5).
The French economy is expected to perform in line with the euro zone over the coming years. However, with French banks heavily exposed to Greek government debt, the effects of the sovereign debt crisis are likely to be substantial. Nevertheless, it should be able to weather additional shocks due to its broad sector balance.
France has four cities in the top 30, second only to Germany. Paris retains a high ranking, mainly due to sustained growth prospects and high wealth levels. Paris mainly serves as a service economy, in which business and financial services account for over 50% of the value-add in the region.
Of all European countries, France is the country with the largest number of companies in the Global Fortune 500, the majority of which are located in the Paris region. The other top French cities are: Toulouse (14/-3), Lyon (21/-2) and Marseille-Nice (26/+5).
Turkey’s GDP growth reached an annual rate of 11.0% in the first quarter of this year driven by production capacity gains and its unrivalled consumption, thanks to a young and dynamic population. Istanbul performed very strongly, supported by the government’s vision to turn the city into a regional financial hub.
Large stable state banks are in the process of relocating their headquarters from Ankara to Istanbul, with the Central Bank and regulatory institutions expected to follow. Despite major steps forward, Turkey’s primary concern is its high inflation and large current account deficit. The other top cities are: Ankara (30/+37), Izmir (31/+35) and Antalya (69/+23).
Source: Citigate Dewe Rogerson
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