The slide in European retail real estate values could extend until early 2023 if, as projected, lagging markets in the EU follow the trajectory of the UK, where prices have already fallen 40% from peak to trough and are only now showing signs of bottoming out, according to a new report issued by PGIM Real Estate.
The office sector, in contrast, stands to benefit much more quickly from the release of pent-up economic activity in the second half of this year as the impact of the Covid-19 pandemic in Europe recedes, according to the study.
Distressed retail, particularly in the UK, and Grade A offices are two of the four investment opportunities the research team at PGIM Real Estate has identified in its outlook report as among the most attractive on a risk-adjusted basis over the next 12 months, alongside residential and logistics properties.
Greg Kane, executive director, head of European Investment Research said: ‘Although the effects of the global pandemic have further to run, the worst of the crisis has now passed, and 2021 is shaping up to be a significantly better year for the global economy and real estate markets than 2020 was. The vaccine rollout should lead to a strong economic bounce-back in the second half of 2021 as services reopen and households spend accumulated savings. A rapid pace of growth, albeit from a low base, will support demand for real estate, creating opportunities for investors.’
UK retail real estate values have fallen around 40% since 2016, when the penetration of online retail sales started to accelerate, with the drop in values intensifying once the share of e-commerce surpassed 16% — a level that is expected to be reached this year in Continental Europe. In contrast, the decline in retail capital values in the EU since the market peak has so far been confined to roughly 15%, but the pace of value adjustment is now quickening. While UK retail property looks close to finding a floor, Continental European values are expected to continue to fall for roughly another 21 months before the bottom is reached, if they track the British experience.
Retail trading conditions remain challenging following the accelerated shift to online spending during the pandemic, exacerbating the existing oversupply of retail space and risk of obsolescence, but the significant correction in values taking place in parts of the market points to an opportunity to invest in a stabilization and eventual recovery of the sector. Value declines are limited, or slowing, on defensive, non-discretionary anchored retail schemes across Europe and, in the UK, on lower-cost retail parks that can compete more effectively with online. For investors with higher risk appetites, sites that offer stable, near-term income or leasing potential and are backed up by longer-term redevelopment are starting to look attractive.
Greg Kane added: ‘As outstanding loans (on retail properties) reach maturity, distress is arising as values adjust to a new, lower equilibrium level, and existing owners and lenders face the need to inject fresh capital.’
