Balancing risk and opportunities in European real estate

BlackRock |10-Oct-2018

Capital at risk. All financial investments involve an element of risk. Therefore the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

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A strategic role

We believe that real estate assets can play a strategic role within a multi-asset portfolio as historically they have exhibited low-to-moderate return correlations with other asset classes. European real estate offers the potential for further diversification by complementing domestic portfolios with diverse exposures to markets that are at different stages of the growth cycle, but still provide high levels of liquidity and transparency. European property returns also offer a relatively high income component, which traditionally tends to display less volatility than capital growth. We believe that thoughtful asset selection and active management can enhance that risk-adjusted potential further.

Investing in European real estate entails taking currency risk. However, given the maturity of the UK property cycle and the uncertainty related to Brexit, we believe the long-term diversification benefits may outweigh the associated hedging costs.

European Map


Past performance is not a reliable indicator of current or future results.
Source: BlackRock Real Assets Research, Oxford Economics, 2018. For illustrative purposes only.

Cyclical opportunity. We see little oversupply in European real estate markets in contrast to the previous cycle. Coupled with growing occupier demand, this has, according to April 2018 Property Market Analysis, led to historically low vacancy rates in many markets and robust rental growth. Structural changes relating to megatrends are also driving significant opportunity for investors.

Discipline is key. At the same time, several markets are further along in the cycle meaning valuations are higher. Across the board, we see greater uncertainty due to those structural changes, political upheaval and rising interest rates. In this environment, we prefer to focus on relatively liquid and supply-constrained markets, selecting assets with strong and regular cash flows that benefit from structural change and can be enhanced by active management.

Understanding long-term performance drivers

To take advantage of structural changes it is important to understand fully the megatrends that are transforming our societies worldwide, including:

Understanding long-term performance drivers


Source: BlackRock, August 2018

Technology: Arguably, the most important trend, technology is already transforming real estate investments and will do so at an increasingly rapid pace.

Demographics: Different social habits of millennials and the differing needs of an ageing population are driving major change.

Shifts in economic power: The rise of emerging economies, most notably China, is having a powerful effect on global property markets.

Urbanisation: Across both emerging and developed economies, populations increasingly converge in urban areas.


Sustainability: a key component of future performance

The final megatrend relates to sustainability, and, in particular, climate change and resource scarcity, the effects of which should not be underestimated. With real estate being a major contributor to carbon emissions and a heavy resource user, both investors and occupiers increasingly look to embed sustainability into the buildings they own or rent, with sustainable assets being able to command a green premium.

Sustainability: a key component of future performance


Sources: BlackRock Investment Institute, April 2018. Notes: this shows the three key pillars and inputs than underpin the ESG rating process across major providers.


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Global reach with local expertise

BlackRock Real Estate


Global reach with local expertise


Source: BlackRock as of 31 March 2018; Professionals includes support staff