The geography of Europe’s luxury real estate is changing. After years in the doldrums, troubled cities like Madrid and Dublin are seeing a substantial recovery and look poised to become the continent’s rising stars, according to a new report by real estate advisor Knight Frank.

Although the global economic crisis initially hit nearly all European cities hard—Knight Frank reports that values in London dropped by 24% between March 2008 and March 2009—the following years saw a two-tier market emerge. Safe havens like the British capital but also Vienna and Geneva drew investors from across the world and, as a result, their markets turned round and began to rise. By contrast, other locations—particularly in the debt-ridden Eurozone—continued to experience dramatic falls.

Last year, however, prices bottomed out and even started to recover in some of Europe’s most embattled cities, with Madrid showing a 5% increase and Dublin a spectacular 24.6%.

Meanwhile, earlier this year, the real estate market in prime central London started experiencing a slowdown. This week, realtors W.A. Ellis reported a 17% drop in sale volumes over 2013, a 1% decrease in values per square foot and price reductions affecting about 25% of the real estate stock currently on the market. “We are enjoying an active spring market with correctly priced property selling well, but the ‘froth’ has undoubtedly come off,” says Richard Barber of W.A. Ellis.

Dublin saw a phenomenal growth in luxury real estate values (Photo credit: Roberto Taddeo)

The London cool-down is primarily a direct result of the British government’s new tax on empty, corporate-owned property, together with the uncertainty caused by next year’s general election, but can also partly be linked to global investors looking for newer pastures where real estate is not as fully valued as in the British capital—research by Christie’s International Real Estate and their British associate Strutt & Parker shows that, in London, entry level prices for luxury real estate have now reached a staggering $7.8 million.

So, says Kate Everett-Allen of Knight Frank, the big question is what will happen next to Europe’s luxury real estate market in the near future. Will wealth continue to flow from both outside and inside Europe’s borders towards established, safe-haven cities? Or will investors flock to cities that are more affordable and offer greater potential for future capital appreciation?

Yolande Barnes of global real estate consultants Savills thinks the quest for greater capital growth and higher income returns will definitely push buyers towards more adventurous locations: “Emboldened investors are now spreading their wings and looking for high yielding secondary properties in [premier] cities, as well as starting to consider the value of second-tier cities in countries with strengthening economies,” she says. “Real estate values will grow as new cities all over the globe rise on fortune’s wheel.”

Earlier this year, Barnes, along with Nick Candy, CEO of luxury interior design and development company Candy & Candy, and Dario Schiraldi, Head of Deutsche Asset & Wealth Management’s Global Client Group, published a joint study on the global luxury real estate sector. The three companies identified Dublin and Istanbul as two of the top twelve ‘rising’ cities that are set to outperform premier markets (the other ten are all located outside Europe).

The Irish capital, where prices for a two-bedroom luxury apartment are in the region of $560,000, is playing an increasingly important role in the domestic economy, according to Knight Frank—it now accounts for a massive 48% of Ireland’s GDP. Consequently, its discounted property looks good value against the backdrop of an improving economy, higher employment rates, and a vibrant culture.

Similarly, Istanbul adds the lures of heritage and culture to a growing economy, rising population, a strategic location at the crossroads of Europe and Asia and attractive real estate prices. In the Turkish city, you can buy a two-bedroom luxury apartment for $280,000—an obvious draw for investors, although the recent political instability may dampen enthusiasm, at least temporarily.

Madrid is one of the markets to watch according to realtors Knight Frank (Photo credit: Moyan_Brenn DeLight )

The Knight Frank study also names Dublin as a market to watch, but replaces Istanbul with Madrid, Rome and Barcelona. The realtor’s data show that Madrid in particular, garnered the greatest increase in the number of prime real estate searches between the first quarter of 2014 and the same period in 2013—a massive 120% spike. Luxury real estate here remains among the cheapest in large European cities at $632 to $883 per square foot (€5,000-€7,000 per square metre), and this conspires to put the Spanish capital—which already accounts for 18% of the country’s GDP and is set to see a 21% increase in the number of UHNWIs by 2023—firmly back on buyers’ radars.

Even higher—23%—will be the rise in Barcelona’s UHNWI numbers. Spain’s second largest city, which produces 12% of the country’s GDP, has also seen luxury real estate searches grow by about 60%. Prime real estate prices are comparable to Madrid’s, and this helps make both Spanish cities appealing not only to affluent private buyers but also to family offices and sovereign wealth funds. “Growing interest from institutional investors—pension funds, hedge funds and insurance companies—is already evident in Barcelona, Madrid and Dublin,” states the Knight Frank study.

Obviously, other factors, from quality of life to security considerations, also drive demand for luxury real estate. In particular, accessibility ranks so high on the list of buyers’ priorities that “new flight routes or the introduction of a winter timetable from key buyer destinations can be sufficient to have a significant impact on demand levels,” according to Everett-Allen.

Buyers certainly cited ease of access as the main reason for purchasing luxury real estate in both Barcelona and Rome, according to Knight Frank. The Italian capital combines good transport links with centuries of culture, lifestyle draws, and relatively competitive luxury real estate prices, which is why the realtor’s analysts picked it as a potential growth market. Values were static in the first quarter of this year and, at $1,449-$1,644 per square foot (€11,500-€13,000 per square metre), they are higher than Madrid’s, Barcelona’s, Dublin’s and Istanbul’s. Nonetheless, they remain attractive compared to London, Geneva or Paris, especially when considering that Rome is set to see the largest GDP increase in 2014 together with Munich and London, and that the local population is expected to grow by 2.1% by 2023.

Monaco is set to remain a premier location (Photo credit: trishhartmann)

Despite this revival of secondary markets, though, some premier world cities are poised to remain at the top of the real estate game in years to come. Chief among them is Monaco, where the country’s minuscule size acts as a formidable constraint to supply. Although prices took a dive in the recession, and are still up to 20% below peak, according to Paul Tostevin of Savills, the Principality tops the chart of the globe’s most expensive locations. Values for prime real estate range from $3,800 to $5,070 per square foot (€30,000 to €40,000 per square metre), reaching up to $11,700 per square foot (€90,900 per square metre) for ultra prime properties, and are likely to grow even further in the next twelve months.

“We expect continued price appreciation in Monaco’s residential markets due to demand from a growing base of global UHNWIs against restricted levels of new supply,” explains Tostevin. Consequently, he adds, “we foresee [prices] will return to peak within the next twelve months with anticipated growth of around 20% before mid-2015.”

Whether they opt for Monaco and London or the new rising stars of Dublin, Madrid, Rome, Istanbul and Barcelona, however, there’s little doubt that global investors have their sights set on European real estate. “Although wealth creation is forecast to be strongest in emerging markets in Asia and Latin America,” concludes Knight Frank’s Everett-Allen, “the appeal of Europe’s luxury bricks and mortar will—due to its history, diverse cultures, architecture and climate—mean it will remain the location of choice for the world’s wealthy.”

Source: Forbes