European real estate well placed as occupier demand rises - CBRE

European Real Estate is likely to continue to outperform other assets in 2016 as the economic recovery drives up occupier demand across all sectors, according to CBRE’s latest forecast.

While concerns about China have created volatility in the equity markets, the combination of low commodity prices and emerging markets’ weakness should enhance Europe’s prospects, CBRE said.
Office leasing increased by 15% in 2015, representing the best year since 2010, but new development starts have only begun to pick up in a limited number of cities, leading to an increase in prime office rents.

CBRE said the main downside risk was that the crisis in emerging markets could grow into a new financial crisis affecting occupiers and investors alike. ‘However, our view is that current signs point to a 1998-style, isolated emerging-market debt crisis rather than a re-run of the global financial crisis,’ said Neil Blake, head of research and forecasting EMEA.

The momentum of investment is shifting from the UK, where volumes have started to dip, to continental Europe, which CBRE expects to have its best ever year in 2016.

Similarly, while yields in the UK are set to remain stable, further yield compression is expected in mainland Europe in the first half of 2016, with a bottoming out by the end of the year, meaning investors will have to look more closely at occupier market fundamentals to generate capital growth.

Another diverging trend has been the polarisation of the retail sector, where prime high street destinations have seen low vacancy and rising rents while secondary centres are continuing to struggle.
CBRE said this trend would continue in 2016, although the sector would benefit from rising retail spending as real disposable incomes grow.

The logistics sector has seen strong rental growth in many markets, driven by the rapid evolution of ecommerce, but growth has been uneven and limited to areas where development land is scarce such as the UK, Ireland and around the large German cities.

The hotel sector established itself as a mainstream asset class in 2015 and is expected to perform strongly again in 2016 as consumer confidence and corporate confidence remain positive. The competitive rate of the euro against other global currencies has also benefited European markets.

'On balance most western European economies will benefit from the ongoing mix of low commodity prices and emerging markets’ weakness,’ said Blake. ‘A buoyant consumer is more important than booming exports to emerging markets.

‘To put it in perspective, leasing is still in an early recovery in many European countries, and occupier demand will continue to improve as the economic recovery continues. On the capital side, continued very low interest rates and the weakness of the euro makes property look relatively attractive regardless of recent falls in yields in some markets.’