Luxury Residential Properties in Europe: When Macro beats Micro

Far sighted property buyers have always taken into account both macro factors like aggregate income levels, population growth, interest rates, FDI levels and micro factors such as the rise of a certain street or neighbourhood, the renovating potential of a property or building, the demographics of neighbourhood buyers, local cap rates as well as seller’s circumstances before making a real estate investment.

Because the property sector is so local in nature micro factors have generally had more influence on the return of a certain investment. In other words, even in a struggling economy or in a challenging city someone could make a fortune by buying the right property at a favourable price (maybe in an up and coming neighbourhood) and renovating it smartly to sell at the market price or at a premium. After all most of the millionaires who made fortunes with real estate did it because they had a superior knowledge of the local areas where they invested in, combined with some practical business logic and good negotiation skills.

However reading macro trends has never been so important than in today’s European luxury property markets, at a time when gaps in interest rates and local banks liquidity have widened, cash strapped governments are targeting wealthy property owners to reap additional tax income and stressed economies are failing to revive internal demand. In an ever increasing globalized world more investor friendly locations (and their property operators) that have a way to attract wealthy international buyers have put in place a true hedging strategy.

The general outlook for the world’s priciest houses recently worsened as concerns over Europe’s debt crisis, the health of the global economy and governments price cooling measures in Asia dissuade buyers ; earlier this year a Knight Frank’s report showed that the average price of luxury homes across 23 key world cities fell for the first time since 2009 by 0.4 percent in the first quarter of 2012, reflecting slowing demand.

the average time to sell a property has nearly doubled from 2010 levels, up to 14 months

While the drop of the luxury property market in Greece, Spain and Portugal, which started soon after the outset of the financial crisis, has been worsened by the heightened sovereign debt crisis, more recently other countries have joined the group. This year a study published by Nomisma has shown that even the most resilient Italian locations, like Rome and Milan have witnessed a decline of luxury property prices, while the average time to sell a property has nearly doubled from 2010 levels, reaching the whopping figure of 14 months. The Italian holiday homes market started to plunge much earlier, during 2011, and has already posted a decline between 10% and 20% from peak values. In certain locations most of the demand is now coming from wealthy international buyers.

those who have properties and other assets in France, worth over €1.3 million, will be facing significantly increased annual taxes.

Crossing the Alps the situation does not look much more promising, especially after the rise of Francois Hollande whose dreadful increase in taxes will undoubtedly have a detrimental effect on locations which rely more heavily on local buyers. A Savills report recently showed that in Paris prices fell 3.4% in the first half of 2012 due to weaker demand and affirms that “a further drop now seems unavoidable”. Hollande’s proposals include increasing tax on rental income from 20% to 35.5%, retrospectively from the beginning of 2012, and raising capital gains tax when people sell properties, from 19% to 34.5%. Meanwhile, those who have properties and other assets in France, worth over €1.3 million, will be facing significantly increased annual taxes.

Until the end of last year the French capital had enjoyed one of the strongest house price growth among European cities, driven by an influx of wealthy international buyers that considered Paris as one of the main continental safe havens for property inestments together with London.

London’s case is a clear example of how investors who foresaw the “flight to safety” could make very profitable real estate investments without knowing the latest redevelopment schemes in the capital or betting on up and coming neighbourhoods. It could all boil down to adopting a very simple strategy: investing in prime central properties. In fact while central London districts are expected to be almost flat this year, they posted an astonishing +51% growth since 2009 .

investors have recently been flocking to the German real estate market, lured by steadily rising house prices, low mortgage rates and a stable macroeconomic outlook.

Bucking the trend, other European locations have posted healthy price growths across their property market spectrum pushed up by positive macro trends. In Switzerland for instance with interest rates near zero and the Swiss Central Bank seeking to prevent the Swiss franc from appreciating, national demand for mortgages has soared, sending real estate prices skywards, even though very recently certain sub-markets have shown indications of a possible slowdown. According to the SNB’s latest financial stability report, mortgage volumes at domestically focused banks grew on average by 6.5 per cent in 2011, while more than one fifth of new mortgages for owner-occupied residential properties had a loan-to-value ratio of more than 80 per cent. Similarly investors have recently been flocking to the German real estate market, lured by steadily rising house prices, low mortgage rates and a stable macroeconomic outlook.

Photo Credit: macumazahn / Shutterstock

In an article published by CNBC Helge Scheunemann, head of research at Jones Lang LaSalle Germany asserts that “the rise in prices we currently see is mainly due to the stable economic situation in Germany and a decreasing unemployment rate, as well as a lack of supply of good property. The higher demand is related to the overall economic situation. “

In conclusion while micro factors remain key in assessing the value of a property and its growth potential (Te Atrium regularly publishes property guides in various countries – take a look at the London property guide here), in an ever increasing globalized and sophisticated world macro factors are due to play a greater role especially at the higher end of the property spectrum.

Luxury Residential Properties in Europe: When Macro beats Micro

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