JULY 2019EUROPE WATCH

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House Prices (Change Cumulative, 2012-2018)

Personal Disposal Income Growth (Real, Cumulative, 2012-2018)

Sources: Oxford Economics, Eurostat

Despite all the dissent during the Brexit process, Brussels and London have one thing in common these days. Both are looking to fill top leadership positions. In the UK, the search for the Tory leadership and subsequently the successor to Theresa May as the next British prime minister has been running for a couple of weeks. The contest is now between the current secretary for foreign affairs Jeremy Hunt, a former remainer turned a rather moderate Brexitieer, and his predecessor, Boris Johnson, one of the most outspoken voices for the leave campaign. At the time of writing, the former Mayor of London is the odds-on favorite, with many pundits talking of a likely “Boris Bounce” for the economy. Over in Brussels, the European Parliamentary elections resulted in a fragmented political landscape. This in turn has complicated the allocation of top jobs, especially the appointment of the new President of the European Commission. According to Ireland’s prime minister Leo Varadkar “it’s quicker to elect the pope”, as neither the Parliament nor the European Council (the body containing the union’s heads of government) can achieve consensus. Germany has insisted on the “Spitzenkandidat” system, a convention by which the “lead candidate” of the largest parliamentary group becomes president of the Commission. However, a Franco-Hispanic axis as well as centrist European parties are refusing to back the lead candidate Manfred Weber. It is now likely that Frans Timmermans and Margrethe Vestager will be ruled out for this position as well. This might complicate an agreement on other key positions as the Presidencies of the Council and the European Central Bank (ECB). However, nobody wants to wait too long for the white smoke, as all these institutions must deal with important challenges such as Brexit, global trade negotiations and the direction of monetary policy.

Data points through end of June 2019.Change represents month-over-month change.

PRINCIPAL CONTRIBUTORS:

Najeeb AhmedEsat Güler

19:002-7

3,473.63Euro Stoxx 50

0.00%ECB Policy Rate

-0.324%10-yr.

German Bond

$66.55Brent Crude

30 bps

EUROZONE HOUSE PRICES GROWING FASTER THAN DISPOSABLE INCOMESThe ECB’s monetary policy is a quite controversial topic. The ongoing ultra-low interest rate period hasn’t led to significant inflation increases in the Eurozone, as it was well below the ECB’s 2% target in the previous years. However, in the Eurozone and other major European housing markets, house prices grew faster than disposable incomes. In Germany, the Netherlands and Sweden, house price rises since 2012 have more than doubled the pace of real disposable income growth.

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HOUSE PRICES VS. DISPOSABLE INCOME GROWTH 2012-2018

This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

Copyright © 2019, CBRE Global Investors, LLC. All rights reserved.

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Berlin Amsterdam Europe*

Source: RCA

Source: CBRE Global Investors, MSCI, Bulwiengesa, *Europe (major cities in Germany, France, Netherlands and Sweden)

REAL HOUSE PRICE GROWTH VS REAL HOUSEHOLD INCOME CHANGE (Q4 2012 - Q4 2018)

RESIDENTIAL RENT INDEX

INVESTMENTS IN ACCOMMODATION SECTOR €BN AND SHARE OF TOTAL COMMERCIAL MARKET

LIVING IN POPULAR CITIES IS GETTING LESS AFFORDABLEHousing in Europe’s major cities is becoming increasingly unaffordable as house price inflation outpaces income growth and prices residents out of the most popular cities. In Dublin, Berlin and Amsterdam real house price growth outstripped income growth by 64%, 55%, 47% respectively. Given the expected cooling of most economies, price dynamics should slow somewhat in 2019 and over the coming years. At the same time, however, low interest rates, strong labour market and the general trend of urbanisation, should keep any slowdown limited. First time buyers are hit by house prices that have strongly outpaced household income growth over the past six years. Lower affordability is driving those who might have bought a home to reconsider and rent.

DEMAND OUTPACING SUPPLY DRIVES STRONG RENTAL RISEOccupier fundamentals in major cities in Europe remain strong and, due to structural supply constraints, residential rents are rising further. Prosperous urban regions benefit from strong migration, which drives the demand for housing. Sound labour markets, broad and large educational opportunities (e.g. universities), very good transport connections and an attractive “live-work-play“ environment are key pull criteria. Strong growth in average rents have been experienced in Berlin and Amsterdam where rents rose by 61% and 32% respectively since 2010. Because of rapidly increasing rents, tighter regulations are now in discussions in both cities but not only there. Basically, in every larger city in Europe discussions about affordability and rental regulations are being discussed.

TIGHTENING REGULATORY AND RENT DETERMINATION RULES ACROSS EUROPEThe regulatory framework differs in complexity and implementation across Europe. Even within countries, legislation can differ from city to city. While Berlin makes headlines by introducing a rental freeze over a period of 5 years, in Amsterdam a ban on newly built owner-occupied homes being rent out is being discussed. Also the Dutch government is working on a legislation that would give municipalities with tight housing markets a so-called emergency button. This would allow them to cap prices for new rental contracts at a certain percentage of a government-set property value. Similar Rent Pressure Zones (RPZs) have been already identified in Dublin where rent increases are capped by 4% p.a.. Politicians across Europe are trying to placate voter discontent about soaring housing costs.

REGULATORY FRAMEWORK - EUROPEAN RENTAL MARKETS

Source: CBRE Global Investors

Soruces: The Economist, Oxford Economics

FAVORABLE OUTLOOK AND STABLE INCOME DRIVES INVESTOR DEMAND Whilst increasing regulation might create a substantial barrier for institutional investors to invest in some markets, demand drivers for residential and accommodation in general are expected to remain favorable and should attract further investments in future. As an investor a thorough understanding of structural and regulatory changes in those target markets is crucial to have a sustainable and profitable investment. Investor awareness with regards to regulation and reputation is needed to avoid possible minefields. The accommodation sector is now much more established than a decade ago accounting for a quarter of total commercial investments in Europe. Appetite for this sector is expected to continue due to the sector’s stable income profile and diversification benefits.

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Real Household Income Change (Cumulative)