European property investors are so spooked by the sovereign debt crisis that a blinkered focus on the best neighbourhoods of London, Paris and Berlin means they are missing much better deals in far-flung locations.
While the most popular districts of Europe’s financially strongest cities are the safest bet given the markets’ resilience, elsewhere there is more money to be made on high-yielding assets with stable tenants on long leases.
“You can’t assume all property outside the best areas is junk,” said Matthew Richardson, of Fidelity Worldwide Investments.
Fidelity owns an office block in Bournemouth, 160km from London, which is rented by a government tax office and produces a yield of 8.25%. That compares with about 5.5% for the best office blocks in London’s main financial district and sub-4% yields for the luxury shops on highly sought-after Bond St.
Property yields — the annual rent as a percentage of its overall value — are higher on secondary assets because they are deemed riskier due to factors like location, lease length, the tenant’s financial strength and the building’s state of repair.
In Dublin, companies like Google are looking for more space and, with a shortage of supply, prime yields could start to come down from around 7% as property prices begin to rise again.
The desire for blue-chip security has focused so centrally that major investors like Qatar’s sovereign wealth fund have snapped up trophy properties from the Champs Elysees in Paris to London’s West End in recent years.
But just on the fringes of prime locations, property can yield as much as 100 basis points more, said Joe Valente, of JP Morgan Asset Management. “As the saying goes, nobody ever got fired for buying IBM equipment and nobody will get fired for buying property in core locations.”
Buying and selling property can be a long and complex process that could deter some first-time investors, given the desire for liquidity, said Andrew Morris of Signature.
For others, its attributes as a physical asset may prove tempting. “With property you will always have the residual value of the bricks and mortar,” Mr Richardson said. “If a bond defaults, you’ll just be left holding a piece of paper.”