4 minute read
European Property Markets
2021 A YEAR OF CHALLENGES AND OPPORTUNITIES
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Real estate market momentum has certainly been picking up with most European markets witnessing good levels of investment activity in Q2 2021. This is a sign of markets now adapting and working around COVID19 restrictions while other markets are further along in terms of life returning to normal.
Total investment volume in Europe in the first half of 2021 stood at €105 billion which is 5% below the same period in 2020, with a strong second quarter across most markets. We expect investment volumes to increase this year, with volumes reaching €260bn, up 10% compared to 2020. As was the case in 2020 we are likely to see investors targeting non-traditional asset classes and logistics, which offer the better returns.
Over the past few years, we have witnessed capital growth take a backseat while income growth has largely contributed to total returns. Looking ahead capital growth will now play a greater role in returns. The strongest capital growth is likely to occur in the logistics sector with growth of 3.2% across Europe, generating a total return of 7.4% over 2021 to 2025.
The retail sector will exhibit the lowest returns. Capital growth for prime high street is forecast at -0.4% and shopping centres will generate -1.6% over the forecast period. Within Europe there are disparities with best performers to include Milan (5.7%), Rome (5.3%) and Madrid (5%). Shopping centres will continue to see the lowest returns across Europe.
To no one’s surprise logistics is the only sector that will see double-digit returns. The top performing markets will be Poznan (11.2%), Copenhagen (10.9%) and Warsaw (10.4%).
Growth and reliance of e-commerce continues and will remain the main driver for logistics. Combined with the lack of space, the strongest rental growth will be generated by the logistics sector, with growth of 2.2% for 2021 and 2022 across Europe. As the development pipeline picks up, rental growth is expected to ease. In 2021 the Nordics will exhibit strong rental growth of 4.0%. We also forecast prime yield compression in all markets, due to the sheer weight of capital targeting the sector.
The worst performing sector in terms of rents will be the retail sector. Over 2021, prime high street rents are expected to fall by -5.0% and -1.5% in 2022. Shopping centres will perform slightly worse than prime high street with rents falling by -6.8% over 2021 with the UK (-11%) and Southern Europe (-10%) the worst performing. We do anticipate shopping centres to begin recovering from 2023 onwards, with rental growth averaging 1.4% p.a. thereafter. We will see the strongest bounce-back in the UK (3% in 2025) and Southern Europe (2.1% in 2025). Although the retail sector’s metrics do not look particularly attractive, we do believe there are now reasons to be cautiously optimistic. Over the medium term, we expect strong total returns at the end of the forecast period, with Spain (6.0%), Italy (5.6%) and Sweden (4.5%) the top performers.
In the office sector, the return to office has resulted in occupational demand picking up again. Although it is unclear what impact flexible working practices will have on future office demand,
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we are likely to see a fall in average floorplates required. For prime offices across Europe, we expect rents to remain stable (0.2%) in 2021. The strongest rental growth will be witnessed in France at 3.0%, with the weakest seen in the CEE region (-2.6%). In contrast average market rents will fall in 2021, with rents declining by -2.9% in Europe, and staying flat in 2022. Rental growth in the office sector will be led by the prime segment, of which there is low supply. This will be reflected in the yields. We expect European prime office yield to harden by an average of 13bps over the forecast period. In comparison, yields on average assets will fall 3bps over same period.
European real estate remains an attractive asset class and is now entering a renewed stage of the cycle. The difference in this cycle will be the growth of alternative and emerging asset classes such as BTR, Healthcare, logistics and Life Sciences. Total returns will moderate into single digits over the medium term and across prime assets in Offices (+6.0%), Logistics (+7.4%), High Street Retail (+3.7%) and Shopping Centres (+4.0%).
Sukhdeep Dhillon, Senior Economist & Associate Director, BNP Paribas Real Estate
