Fund Managers Warn of European Property Bubble

Investment firms are ringing the alarm as retail inflows and lower bond yields drive up asset prices in European commercial real estate.


Fund managers are worried about the rush of retail investors creating froth in the European prime commercial real estate market.

Adrian Benedict, real estate investment director at Fidelity International, warns that the sector’s falling bond yields and higher inflows from insurers and retail investors are “the hallmarks of a bubble.”

Fund managers say that rising prices are affecting prime commercial retail sites across Europe, notably in France and Germany, as well as office locations in Switzerland and the U.K. Benedict said the prospect of climbing interest rates could result in a sharp withdrawal of retail money from the market, leading to mass fund liquidations and, importantly, an impact on the price of real estate assets. Essentially, if there are no interested buyers when retail money exits, prices will continue to fall as investors shun the assets.

“We have seen a bull run for number of years,” Benedict said. “If the requirement for liquidity triggers pricing falls, that will have a knock-on effect on valuations and that may encourage some investors to make decisions that they otherwise would not have.”

Economists have expressed concern about froth in European property markets in recent months. In May, Reuters reported that German Bundesbank board member Andreas Dombret warned during a speech in Frankfurt that “the traffic light is clearly on yellow” in Germany, urging banks and financial regulators to be alert. Meanwhile, the yield from French real estate investment trusts has tumbled to 4.63 percent last year, from 8.18 percent in 1999.

There are regional differences in how commercial real estate sectors are behaving, even within a single country, according to fund managers. For example, James Thornton, chief executive officer of Mayfair Capital Investment Management, said U.K. commercial real estate will likely perform poorly in central London.

“Prime central London offices and U.K. high street retail are likely to be the laggards,” Thornton said. “The high street continues to face challenges from significant structural changes while central London offices look most vulnerable to Brexit.”

[II Deep Dive: U.K. Housing Supply Can’t Meet Demand for Real Estate Investment Funds]

Last year, fund managers took steps to manage concerns about market liquidity after Britain’s vote to leave the European Union. The Financial Times reported in July 2016 that seven large funds holding about £15 billion of commercial real-estate assets were forced to suspend trading, a move that trapped investors’ money after a rush of redemptions tied to Brexit.

Cohen & Steers’ head of European research, Rogier Quirijns, warns that this experience could yet be repeated – and at a larger scale – if interest rates rise and funds find there is no buyer for the assets.

“I don’t think that risk is out of the system,” he said. “That is a very big risk if rates rise and open-ended funds can’t liquidate their assets.”