There is growing evidence that the PIIGS can fly: shortage of product and strong investor demand are driving growth in the commercial real estate sector in the five countries the acronym refers to - Ireland in the north-west, Spain, Italy and to a lesser extent Portugal and Greece.
That was one of the key conclusions of PropertyEU's Southern Europe Investment Briefing, which was held at Savills' headquarters in London on Friday.
Commercial real estate investment activity in the region reached €7 bn in the first half of this year, according to Savills research. And the full-year figure is expected to match last year’s total of €18 bn, which marked an increase of 27%. This represents a stark contrast to the slowdown in activity seen in other European markets so far this year.
Southern Europe still only accounts for 7% of total activity in Europe in the sector, a share that is small but growing fast. In Spain, the largest market, H1 activity increased by 20% over the long-term average, while in Italy the increase was 40%.
'Cross-border investments drive the scene, although local investors have been increasingly active,' said Eri Mitsostergiou, director of European Research at Savills. 'European and US investors dominate, while there has been a slowdown in interest from the Middle East and Asia.'
Retail leads
Retail is driving the recovery in southern Europe, with prime regional shopping centres and prime high street units in strong demand. But there are also opportunities in redevelopment and in undersupplied regions. Logistics is increasingly important, with a 34% rise in investments across the region in H1 2016 to take advantage of the growth of ecommerce. Italy, in particular, has recorded a spectacular 80% increase in investments so far this year to €200 mln. 'The volumes are still small, but the trend is clear,' said Mitsostergiou.
The office sector is being buoyed by improving economic fundamentals and good rental growth prospects, but investment activity remains subdued because there is no supply to match demand, especially for prime offices in the main cities. 'There is strong demand for the right type of product, but lack is supply is a real problem,' said Mitsostergiou.
Tourism is growing in the region, partly due to geopolitical tensions that have virtually halted flows to many North African and Middle Eastern destinations, and is supporting investments in the hotels and second homes sector. Despite the challenges they face on other fronts, Portugal and Greece also offer interesting opportunities in the tourism sector, experts agreed.
The risks in southern Europe are economic (a slow recovery), demographic (an ageing population and high youth unemployment driving emigration) and political (uncertainty over future prospects). But most investors seem to believe the opportunities outweigh the risks, said Mitsostergiou: 'They see an interesting story because most yield compression is done now and the differential with bonds remains attractive.'
Watch the video highlights of the Southern European briefing on our YouTube channel