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TRANSCRIPT
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Investors are increasingly looking for new ways to find opportunities away from the relatively crowded prime markets in Europe’s top cities. This paper examines whether innovation is one metric for finding such lesser-known opportunities.
Historically, science technology, engineering and mathematics – bound together under the acronym STEM – have been at the forefront of all the major industrial revolutions from the invention of Watt’s steam engine in the UK in the 18th century to the digital age (computers, internet, mobile phones) which is in full swing today.
One way to forecast future growth spots, therefore, is to measure innovation. To this end, we have analysed data from the European Patent Office (“EPO”) . The fruits of innovation tend to be delivered over a relatively long time horizon, so we believe this data sheds light on the long-term growth prospects of Europe.
Magnify: Investment opportunities in Europe’s innovation hotspots
Executive summary• Mapping innovation offers a new way of
finding opportunities away from crowded prime markets in Europe’s top cities
• Technological advances drive economic expansion and thus real estate demand
• Innovation shows positive correlation with rental growth
• Germany leads the way in continental Europe
• Science parks drive innovation in the UK, offering opportunities in out-of-town office investment
• Good value innovation hotspots include Eindhoven, Stuttgart and Gloucester
185,885patents filed in Europe over 3 years
40%of patents filed in Germany
36%of UK patents come from science parks
1 The EPO administers the European Patent Convention, which covers both the EU member states and a number of other jurisdictions, notably Switzerland and Norway.
Fig 1: European patent applications highlight innovation hotspots
Source: EPO, QS University Rankings, M&G Real Estate. Red areas highlight the strongest zones of innovation and green dots represent the major STEM universities.
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When adjusted for working age population however, Germany loses the top position and moves into fourth place behind the smaller countries of Switzerland, Finland and Sweden.
Fig 2: Germany in the lead
5,000
15,000
20,000
10,000
25,000
0
2010 2011 2012
Pate
nts
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yea
r
Com
pa
nies
wit
h 10
0 +
pat
ents
Companies with 100+ patents (number)
Germany
United Kingdom
France
Switzerla
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nds
Sweden Ita
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Finland
Belgium
Austria
Denmark
Spain
Ireland
Luxe
mbourg
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Portugal
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Source: EPO
Fig 3: R&D spend fuels innovation
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R&
D s
pen
d (%
of
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P) Switzerland
Finland Sweden
Germany
Netherlands
Denmark
Austria
France Belgium
Ireland
Italy
Norway
Spain
Portugal UnitedKingdom
Patents per 10,000 workers
255 10 15 200
Source: EPO, Eurostat
On a per capita basis, countries that spend a higher proportion of national income on R&D tend to file more patents. Therefore, policies that encourage R&D spending are likely to increase the stock of intellectual property and long-term economic growth prospects.
Germany still scores relatively highly in this regard, supporting its status as the key centre of European innovation. One particular reason for this strength relates to the number of technical universities along Europe’s innovation “backbone” (marked by green dots in Fig 1). Mittelstand companies have a strong culture of collaboration with university scientists and engineers in developing new technologies which drive their growth.
Other hotspots – unsurprisingly – include some of Europe’s largest cities such as Paris, London and the Nordic capitals. Although this is likely to be of less interest to investors trying to spot off-the-beaten-track opportunities, it follows that R&D tends to take place where people work, and people tend to work close to where they live. However, it is worth noting that the large Spanish and Italian cities of Madrid, Barcelona, Rome and Naples make only a limited impression on the map.
Germany leads the way
Between 2010 and 2012 (the most recent years for which data is available) a total of 185,885 patents were filed with the EPO, of which 166,471 were accompanied by an address. Mapping these coordinates shows a highly innovative region spanning from the Netherlands and Belgium down through the western side of Germany to northern Switzerland. The strength of research and development (R&D) activity in this area suggests that it will provide an essential pillar for Europe’s economy over the coming years and decades.
What drives this innovative “backbone” in Europe is the Mittelstand, the collection of small to medium sized enterprises that focus on innovative and high-value manufactured products, which occupy niche market leadership positions in numerous segments in the world. In Germany alone, the Mittelstand employs approximately 70% of all employees in the private sector. The Rhine-Neckar region (home to companies such as BASF and SAP and also considered to be Europe’s Silicon valley) and the Ruhr region (the former heavy industrial area) stand out as particularly strong regions of activity.
Germany accounted for 40% of European patents filed over the studied time period (2010-2012) overall, way ahead of the 15% of its nearest rival, France.
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Fig 5: Innovation and rental growth
Innovative workforce (standardised score)
Ren
t gr
owth
(10
-yea
r ave
rag
e)
6.0-6%
-4%
-2%
0%
2%
4%
6%
-3.0 -2.0 -1.0 0 1.0 2.0 3.0 4.0 5.0-4.0
Rome Lisbon
Naples
Leeds
Valencia
Birmingham
Madrid
Seville
Barcelona
Bolonga
Århus GothenburgGuildford
Stockholm
Frankfurt am Main
Düsseldorf
Cambridge
Zürich Paris
Munich
Espoo
StuttgartRhine-Neckar
Eindhoven
Fig 4: Patent concentration against size of workforce
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Source: EPO, Eurostat. Orange bars denote German cities.
Source: M&G Real Estate, PMA, EPO, Eurostat
The results highlight a number of innovative cities that are not necessarily at the forefront of the institutional pan-European investors’ attention. Our research suggests that Eindhoven in the Netherlands, the Rhine-Neckar region (which includes the cities of Mannheim, Ludwigshafen, and Heidelberg) and Mainz in Germany, Espoo in Finland and Basel in Switzerland are among the smaller cities with strong prospects for long-term economic growth. German locations (highlighted in orange in Fig 4) dominate the top innovative cities list.
Innovation fuels rental growth
Investing in cities with dynamic innovative workforces has two key benefits to the investor. Firstly, in the event of a tenant departure, a landlord operating in a market with an innovative workforce is likely to be able to refill that space more quickly. Expanding companies generate occupier churn in office markets, improving prospects for filling vacant space. This can come from either the innovative companies themselves or from a range of support business/professional services firms that facilitate growth.
Secondly, these innovative locations are more likely to have stronger rental growth. Corporations and people invest in R&D in order to develop products that, once patented, will result in growth which should in turn enable them to take on more staff, increasing the need for office space. This translates into stronger demand for real estate, putting upwards pressure on rents.
The analysis can be fine-tuned further by correcting the data for working age population (defined as people aged between 15 and 64) and stripping out cities with fewer than 100,000 workers which would generally be too small to be easily accessed by institutional real estate investors. (Notably, this filter removes the small market town of Malmesbury in South West England, which is home to Dyson – the maker of innovative hand dryers and vacuum cleaners and which was given as the address on 123 patents between 2010 and 2012 despite having a population of under 6,000.)
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Fig 6: Real estate value in Europe’s innovation hotspots
Innovative workforce (standardised score)
Cur
rent
yie
ld (%
)
6.03.0
4.0
5.0
6.0
7.0
8.0
9.0
-3.0 -2.0 -1.0 0 1.0 2.0 3.0 4.0 5.0-4.0
Eindoven
Mannheim
StuggartMunich
parisZürich
Cambridge
DüsseldorfFrankfurt am Main
Oxford
Stockholm
LeipzigMarseille
Barcelona
Seville
Madrid
Glasgow
Valencia
Naples
Rome
Source: M&G Real Estate, PMA, EPO, Eurostat
Europe’s top ten patent universities
Technical University of Munich Germany
Paris Diderot University – Paris 7 France
Eindhoven University of Technology Netherlands
KTH Royal Institute of Technology Sweden
Universität Basel Switzerland
Humboldt University of Berlin Germany
Swiss Federal Institute of Technology Zürich
Switzerland
University College London (UCL) United Kingdom
University of Milan Italy
King’s College London United Kingdom
Our analysis of the 46 markets for which rental data is available shows a positive correlation between towns with more innovative workforces and historic levels of rental growth. Broadly speaking towns and cities with low innovation and low rental growth are in Spain and Italy. Meanwhile, at the other end of the scale, cities in Northern Europe, particularly Germany, display the greatest levels of innovation and rental growth.
providing labour to innovative businesses. This in turn has encouraged private companies to base themselves near-by, fuelling demand for real estate.
This is particularly so for the Eindhoven University of Technology which, along with institutions such as the High Tech Campus (an incubator and collaboration space), provides a fertile environment for innovation.
Rental growth prospects, of course, must come at the right price – having identified the innovative hotspots, investors need to consider whether they represent good value based on current yields. In Fig 6, markets below the diagonal line represent poor value relative to their level of innovation, whilst those above might be considered good value.
Thus, cities like Oxford, Cambridge, Eindhoven and the Rhine-Neckar region represent good value relative to other markets. Meanwhile, European gateway cities such as Paris, Munich, Zurich and Stockholm may be considered a little expensive given the inventiveness of the workforce, with second tier cities offering stronger long-term prospects. (It is worth highlighting that cities like Paris, Munich, Zurich and Stockholm have other draws to investors such as their diversified occupier base as well as added liquidity, transparency and larger lot sizes.)
Another way of looking at the pricing side of European office markets is to look at current pricing vs their 10-year averages. This approach puts more emphasis on the current cycle as it provides a view on where pricing has come in most significantly. Current yields for most markets are below their long-run averages (this trend is stronger for markets with more innovative workforces) suggesting that in this cycle investors are targeting the
One reason for this is the concentration of the leading STEM universities in Northern Europe. According to our distance analysis of 2012 patents and leading universities, 30% of the published patents fall within a 5km radius of a leading STEM institution, rising to 45% within 20km. These technology universities have been particularly successful at fostering synergies with the private sector, through joint projects as well as through
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Fig 7: Real estate value in Europe’s innovation hotspots (versus history)
Innovative workforce (standardised score)
Yie
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pre
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10
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-25
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-3.0 -2.0 -1.0 0 1.0 2.0 3.0 4.0 5.0-4.0
Eindhoven
MannheimStuttgart
Munich
ParisZürich
Cambridge
Düsseldorf
Frankfurt am Main
Oxford
StockholmGuildford
Gothenburg
Leipzig
Marseille
Barcelona
Seville
MadridGlasgow
Valencia
Naples
Rome
Source: M&G Real Estate, PMA, EPO, Eurostat
Fig 8: Patent applications across the UK
Source: EPO, UKSPA. Red areas highlight the strongest zones of innovation, green dots represent the major STEM universities and black dots show science parks.
town offices (including science parks) will suffer at the expense of a growing preference among the younger generation to work in town centres. Whilst we agree that this shift applies to much of the UK’s dominant business, professional and financial services companies, there are clearly exceptions.
markets with more secure economic prospects. That said, there is not a perfect negative correlation.
Indeed markets such as Eindhoven, Stuttgart and Mannheim (in the Rhine-Neckar region) look relatively attractively priced. At the other end of Fig 7 (to the left hand side), it is unsurprising that yields in the Italian and Spanish cities of Rome, Naples, Valencia and Seville are relatively elevated, potentially reflecting the structural issues in these cities (as well as the lack of innovation).
Science parks dominate in the UK
The UK is the largest property market in Europe and has the second largest economy. In terms of the number of patents filed however, the UK ranks ‘only’ in third place and well behind Germany. This can be explained partly because of the economic dominance of its professional, financial and legal service industries – areas where innovation rarely leads to the patenting of new ideas and products.
Unlike in much of Europe, the UK has a tradition of science parks which are often built close to the top research universities (in Fig 8, black dots represent the UK’s science parks whilst the green dots show the leading STEM universities). These science parks dominate the innovation landscape – 36% of all patents filed in the UK are from science park locations.
To the property investor this is interesting because received wisdom over recent years has been that out-of-
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Indeed, our research shows a positive correlation between rental growth and how innovative the workforce is. Markets in the Golden Triangle (a globally significant cluster of research universities in the South of England, linking Oxford, Cambridge and London) offer the best prospects for rental growth alongside innovative workforces.
Fig 9: Rental growth in the UK’s innovation hotspots
0%
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-6.0%
Ave
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Innovative workforce
Cambridge
Gloucester
Woking Oxford
Watford
Aberdeen
Edinburgh
Exeter
Glasgow Leeds
Dundee
255 10 15 200
Source: M&G Real Estate PMA, EPO, Eurostat
Fig 10: Real estate value in the UK’s innovation hotspots
Innovative workforce (standardised score)
Yie
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ad -
curr
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yiel
d ve
rsus
10
-yea
r ave
rag
e (p
erce
ntag
e p
oint
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6.0-20
-10
-15
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10
15%
1.0 2.0 3.0 4.0 5.00
Cambridge
BracknellGloucester
Woking
Oxford
Slough and Windsor
Watford
Welwyn & HatfieldCrawley
Southampton & Eastleigh
Edinburgh
CardiffMilton Keynes
Liverpool
Plymouth
Colchester
York
Exeter
Glasgow
Peterborough
Leeds
Dundee
Source: M&G Real Estate PMA, EPO, Eurostat
Conclusion
With elevated competition and pricing in some of Europe’s prime locations, now is a good time to look further afield and innovation is one way of identifying potential in the region’s lesser known markets.
Our research shows a positive correlation between innovation and rental growth, supporting the view that STEM industries drive economic growth. Locations near Europe’s top technology universities stand out as the main innovation hotspots. This also underscores the potential of the UK’s science parks, which have been overlooked by some investors in recent years in favour of town centre offices.
Combining innovation credentials with current pricing identifies a number of potentially attractive investment locations in lesser known cities across the UK and continental Europe (including Eindhoven, Stuttgart and Gloucester) which we believe could offer investors strong, long-term returns.
Taking into account both current and historic pricing, out-of-town offices in Oxford and Cambridge look relatively expensive for investors buying today but have the potential to offer strong rental growth for current owners. Some of the best opportunities for less obvious investments in the UK, on the other hand, include the likes of Bracknell (close to London) and Gloucester (in the West of England).
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