The real estate market in the European Union (EU) could thin over the next 50 years, with the office, industrial, and retail markets declining as a percentage of gross domestic product (GDP). Population growth would offset this, although achieving such growth may prove difficult for most EU countries. Furthermore, an aging European population will drain funds from the EU that could otherwise be spent on development.
By 2060, the United Kingdom will become the most populous European state excluding Russia, followed by France and Germany, according to John Glascock of the University of Connecticut. Overall, however, the EU will see a greater decline in population than any other large area.
“From a real estate point of view, think about trying to make money when the population count is going down and down and down,” said Glascock at a recent conference. “The answer is immigration. All the key countries [U.K., France, and Germany] are experiencing low birth rates, but the U.K. is still experiencing immigration to offset internal negative growth.”
A caveat, Glascock pointed out, is the U.K.’s recent enactment of immigration caps, which could lower growth and worsen economic conditions. While population growth would enable the U.K. to pay for its elderly, who will represent 49 percent of society by 2050, without it there won’t be enough capital to fund development. “As a whole, the EU will be losing about 2 percent of its total cash per year to buy things with money it already has and it’s going to be short of capital,” he explained.
In terms of actual stock growth, there are limitations given the lack of development finance currently available in the market from banks. “It is likely to have implications well into the next decade,” says Rosemary Feenan, international director of research for Jones Lang LaSalle and ULI’s incoming chair for policy and practice in Europe. Conversely, she anticipates a greater requirement to refurbish existing stock, driven by the sustainability agenda.
The decline of men as part of the workforce will compound the social burden Glascock describes. Meanwhile, a relative fall in wealth and a rise in debt will pull down economic growth. “If you stifle immigration and increase debt, you have to start worrying about the implications for real estate,” he said.
In Feenan’s opinion, the large economies on the edge of Europe such as Turkey, which has seen reasonably strong population growth, and Russia, which as a nation is getting richer, offer substantial potential growth and “might be the really big stories over the next 50 years.”
The eastern European economies are relatively poorer than the western European ones and therefore have more potential for economic growth. Also, some of the property markets in eastern Europe are less mature, so they are likely to grow the most.
Although the EU’s real estate market could wane in relative importance over the next 50 years, with the office, industrial, and retail markets declining as a percentage of GDP, Feenan says that “taking things as a proportion doesn’t mean things won’t grow, even if not quite as fast as before.”
For example, the manufacturing industry in the U.K. has been in long-term decline proportionately, but in terms of its absolute size it is bigger now than ever before.
She adds: “As incomes go up, capital values are likely to follow. And as people become wealthier, they will save more money, so investment in property as an investment is unlikely to decline in importance.”