European non-prime property has begun to outperform prime

Non-prime property has finally begun to outperform prime according to Joe Valente, JP Morgan Asset Management’s head of strategy for real estate.

Valente says: “Capital values are expected to rise by 10 per cent in the non-prime sector in 2014 and seven to 10 per cent in 2015. This compares with around five per cent per annum at the prime end of the market.
“Market conditions today are beginning to look remarkably like those of the early 2000s when non-prime yields started from a relatively high level, at a time when GDP growth was gathering pace from a low base, investment demand began to increase rapidly due to domestic institutional demand as well as the availability of debt which eased considerably in a very short period.”
Valente cites that there has been a 20 per cent growth in transaction activity in Europe in the 12 months to end of 2013, which amounted to just under USD200bn, compared with USD160bn in 2012. Moreover, it is the fact that domestic institutions are back in the market as net buyers of real estate which will have a profound effect in terms of stabilising real estate values in secondary/regional markets.
He says London remains the number one global market in terms of activity and that London and Paris are in the top five global markets, with over USD50bn transacted in 2013.
However, as well documented, the purchasing of prime property has been driven mainly by sovereign wealth funds with large amounts of capital to deploy. In contrast traditional real estate investors have been waiting for more attractively priced opportunistic investments.
Valente says: “The growing number of investors looking to invest in Europe opportunistically is gathering pace, particularly as non-prime is much more attractively priced than prime. If capital values continue to rise, we expect 2014 and 2015 to be key investment periods for non-prime European real estate.”

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