OUTLOOK 2019: Principal Financial Group sees core RE in Europe as a play

Still healthy economic growth and rock-bottom interest rates will support Eurozone real estate, but investors should be cautious in the UK  

As 2019 breaks, what is in the collective mind of a top 10 global real estate manager from the US?

Principal Financial Group, the retirement, insurance and asset management giant with $ 667.8bn (€ 586bn) or assets kicks off its Inside Real Estate annual strategy outlook with the first key theme being 'slower, synchronized global growth'.

Its report states how 2018 was a peak year for global growth and though 2019 will be a good year, the growth will not be robust. 'We anticipate that the global economy will experience slower but still healthy growth over the next 12 months,' it says.

However, there is plenty of good news for Europe, it seems, which will be comforting for the company given its subsidiary Principal Real Estate Investors ($ 74.5bn) acquired INTERNOS Global Investors to form Principal Real Estate Europe in 2018.

Healthy growth

Principal Financial Group says that whereas in the US the Fed has enough confidence in the economy to continue increasing interest rates, by contrast Eurozone and UK monetary policy normalization is trailing. This divergence in policy rates should provide a 'favourable capital markets backdrop for European real estate opportunities, especially for core strategies that can take advantage of accretive debt'.

States the company, 'In our view, this differential in the interest rate environment should provide core real estate investors in Europe the room to modestly outperform the US. For offshore investors, the relatively low cost of hedging European versus US strategies may also offer some short-term benefits. '

Zoning in on Europe, the company summaries Europe's economy as being in 'good shape'. It states, 'The broad themes of increasing capital expenditure, buoyant labor markets, and rising consumption remain intact across the Eurozone.' And, while the Eurozone has peaked its peak with 2017 as the strongest year in a decade, 'business and consumer sentiment indicators remain supportive or slower but above-average growth of about 1.5% -2% in 2019-2020'.

'Like the US, the outlook for investment is positive with rock-bottom interest rates making their way through to capital expenditure. Bank lending has accelerated, suggesting improved appetite for funding. While the European Central Bank is confident enough to end quantitative easing (QE) in December 2018, it is clear that monetary policy is accommodated by reinvesting funds from maturing securities. Capital markets do not expect the first interest rate hike before late 2019. '

Cautious on UK

Principal Financial Group paints a different story in the UK, however. Initial fears of an economic collapse following Brexit were unfounded, highlights the company. Still, the outlook for the UK has become 'increasingly fuzzy' given the uncertainty of the May-led government to push forward through Brexit by March 2019. 'In the UK the real outlook on Brexit, real estate investors should treat investment opportunities with caution and focus on occupants with long-term business plans and well-protected covenants. ' says the firm.

It adds, 'Within core real estate, we see modestly better relative value in the Eurozone compared to the US, predicated on occupier demand and a more favourable capital market outlook. We are less optimistic on the UK where Brexit challenges are starting to feed through into tenant demand and capital market conditions. '


Given the US and Europe are exhibiting late-cycle real estate dynamics, over the short term, investors need to find and invest in markets with income potential, advises the company.

Longer term, investors should strategically focus on digital drivers on changing demographics, innovation, and globalization for sustainable investment opportunities.

Principal Financial Group goes on to mention ongoing strength in logistics and warehouses in Europe. It also says in the Eurozone, sustained economic growth will continue to drive demand for commercial real estate space, eroding existing capacity in large developed cities and generating development opportunities. The pace of demand should remain healthy across all types of technology and innovation, and that is the forefront of secular change globally.

Says the company, 'Unquestionably, the aging population of Europe, and increasingly the US, offers considerable investment opportunity through an array of real estate programs that range from senior living, assisted living, to end of life accommodation.'

And it is significant growth in younger age cohorts, which are going to require a different set of real estate solutions that range from flexible co-working space to rent residential options.


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