Germany tops the list of the most under valued real estate investment markets

According to the new analysis from Knight Frank, Canada and Germany have the greatest potential to receive additional global real estate investment and could attract a further €3.8bn ($4.5bn) and €2.6bn ($3.1bn) of real estate capital per year respectively. The analysis, part of Knight Frank’s Active Capital report, has been conducted using a bespoke ‘gravity’ model, based on the models used to forecast international trade.

For the first time, Knight Frank has created a model encompassing over 40 variables which impact on inbound real estate investment, including GDP per capita, the relative strength of currency and location of the destination country. Crucially, the model also considers a range of social and cultural factors that impact upon the flow of capital from one country to another, such as shared language, existing trade agreements, and shared common religious worship.

The analysis shows that six countries in Europe are attracting less inbound real estate investment than expected. Germany, which Knight Frank calculates could support an additional €2.6bn ($3.1bn)per year, is the most underweight European market, followed by Switzerland, Sweden, France and Belgium. Annual investment into Austria is also significantly below the level forecast by Knight Frank’s gravity model.

Outside Europe, Knight Frank identifies current inbound real estate capital into emerging markets Indonesia and Malaysia as €860m ($1bn) per annum below the potential level.

William Matthews, Head of Commercial Research at Knight Frank, said: “For the first time we have applied the type of spatial interaction model used to forecast global trade to estimate the level of real estate investment that global markets could support. By looking at the market and economic fundamentals, and by unpicking the socio-economic factors which impact on the flow of capital between individual countries, we have found that Canada and some of Europe’s most advanced real estate markets – including Germany and France – could support more inbound investment. While competition provided by domestic investors in each market is one factor that can crowd out inbound investment, our feeling is that this sort of barrier will become less important over time, as appetite for cross-border transactions increases.”

Ole Sauer, Head of Capital Markets, Berlin, at Knight Frank said: “The potential inbound capital will have a hugely positive effect on domestic German investors and, more importantly, the overall positive sentiment surrounding our healthy real estate marke. This confidence is already leading to a surge in new Grade A office developments, an area where Germany is definitely behind international competing markets who have a far greater number of state-of-the-art office complexes.”

Which countries should see more inbound real estate investment than current levels?