4 minute read
European Property Markets
EUROPEAN PROPERTY MARKETS MIXED FORTUNES
Sukhdeep Dhillon, Senior Economist & Associate Director, BNP Paribas Real Estate
Since 2012, Newsec has been a BNP Paribas Real Estate Alliance Partner, which gives Newsec access to an international network of clients and relevant connections. The alliance allows for both Newsec and BNP Paribas to expand coverage, and help to advise you and drive your real estate strategy internationally.
Mixed Fortunes Most European markets witnessed solid investment activity in the first quarter of 2020 with some even witnessing higher volumes compared to last year. Total volume of investment in Q1 was €69 billion, 46% higher than Q1 2019. It is safe to say no one truly anticipated the impact covid-19 would have across most parts of the world. Lockdowns and restrictions hit economies, industries and livelihoods hard. As a result, records were broken, all for the wrong reasons. Investment activity grinded almost to a halt.
With restrictions now eased, and hopefully the worse of covid-19 behind us we do expect activity to regain some momentum in Q3 before markets pick up fully in Q4. Nevertheless, 2020 will see a sharp reduction in transaction volumes across Europe. Cross-border transactions have been impacted hugely by restrictions.
Flight to safety The “flight to safety” became a feature of the previous financial crisis, whereby investors were cautious and
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selective in their choice of assets. But real estate was one of the winners in the aftermath of the financial crisis. Similarly, during this pandemic, with negatively yielding government bonds, commercial real estate will look attractive. However, it is worth bearing in mind that during recessions the perceived risks to commercial real estate also increase. Property yields will move out across markets. Furthermore, the gap between prime and secondary property of the same asset class is likely to widen, particularly for retail, reversing the trend we witnessed pre-covid.
Offices in tricky waters For the office sector, immediate outcomes quickly became obvious, as office buildings emptied with many working from home. Only time will tell whether this will prove to be a structurally transformative experience for the market. Another major impact has been on the development pipeline, which was already substantially delayed. We may see future large-scale units delayed further as occupiers begin to weigh up their requirements.
Nonetheless, we expect prime rental growth for European offices to range between -2.6% to +1.9% over the 2020–2024 forecast period. The region with the strongest rental growth at the end of the forecast is likely to be the Nordics at 2.7% in 2024. Offices will witness a short-term expansion in prime yields over 2020–2021 before compression resumes towards the forecast end 2023/24.
Logistics a clear beneficiary The logistics market is a clear beneficiary from European lockdowns. The consumer led segment is witnessing a spike in occupational demand brought about by changes in consumption habits during lockdown.
For the logistics sector we expect prime yields to cease compression and remain stable, before resuming compression in yields in 2021. All regions are expected to experience further compression post-2021, reflecting post-covid investor demand and the reliance of e-commerce intensifying.
Recession to magnify problems for retail Lockdowns meant shops were closed for several months. Retail was already undergoing restructuring. It is not surprising that we anticipate severe downward pressure on retail over the first two years of our forecast period. Our forecasts include prime retail in core cities. This retail segment derives considerable revenue from tourist spending as well as domestic shoppers. Tourist spending almost vanished with the restriction on travel. It may be slow to return as its volume is tied to factors such as air travel safety. At the European level, we anticipate rents falling by -5.8% in 2020 and -2.7% in 2021. The three regions under the most severe pressure in 2020 are CEE (-15%), Benelux (-8.4%) and Southern Europe (-8.1%).
No double digit returns European office prime market returns will average about -2.2% in 2020. What is positive about returns for the office market is that we anticipate a strong recovery, with returns of 6% by 2024. Logistics total returns are anticipated to be more stable at 4.3% in 2020 for Europe as a whole before increasing to 5.6% in 2024. Logistics overall represents the most stable sector for return across the forecast period. The impact of covid-19 on our revised forecasts is most strongly experienced in the retail sector. European retail is likely to post -8% returns in 2020 and we may even see double digit negative returns in a number of regions including France (-21%), CEE (-17%), Southern Europe (-12%), Benelux (-11%) and the UK and Ireland (-10%). Negative returns are likely to reverse over 2021 with all regions creating low, positive returns by 2024.
Risks to the forecast Covid-19 represents a different kind of systematic risk which was not factored into the previous forecast round and effectively reversed the transition to micro risks shaping outcomes. The re-emergence of covid-19 in winter is a major downside risk which could potentially damage economies and markets further.
