CBRE, the global property advisor, is allaying fears of a protracted downturn in European real estate with an upbeat forecast of investment levels to come.
In its Real Estate Market Mid-Year Outlook 2020 for EMEA, the company says it expects aggregate European commercial real estate investment to fall by between 30-40% year-on-year in 2020. However, provided occupier markets aren’t challenged further, investment activity is forecast to return to pre-pandemic levels by 2022.
‘CBRE expects investor appetite for commercial real estate to strengthen in the coming quarters as investors are lured by the sizeable spread of property yields over long-term interest rates,’ the outlook continues.
Jos Tromp, head of research Continental Europe, explained: ‘The previous cycle, marked by record investment, has ended abruptly due to this black swan event, with the occupier side of the market particularly impacted in the short term by a sudden decline in economic activity.
‘Nonetheless, the continued low-interest rate environment, coupled with ample unallocated capital means the market is well-positioned for a bounce-back with certain sectors proving very resilient.’
Whilst CBRE expects the economy to bounce back in H2 2020, the pandemic’s effects have been so strong in H1 2020 that the year as a whole will still register a substantial contraction of economic activity.
CBRE predicts that euro area GDP will contract by 8.3% in 2020, before rebounding strongly by 6.4% in 2021. It will take until 2022 before euro area GDP recovers to the levels seen in Q4 2019. Short-term interest rates are not expected to rise until 2023, with central banks adhering to 'lower-for-longer' interest rate policies and making significant asset purchases that will keep long-term interest rates at historically low levels, which is positive for the real estate market.
Office occupier demand across Europe is shifting increasingly towards tech-enabled 'smart' space, with a widening value gradient between prime, tech-enabled buildings and older stock offering development or refurbishment opportunities. Health, well-being and sustainability are also becoming the touchstones of occupier choice.
CBRE expects the ‘temporary mass remote working experiments’ brought on by Covid-19 to accelerate the trend of flexible working strategies, rather than lead to a wholesale structural shift away from office use.
A high-quality, amenity-rich city centre office is likely to be used to both reflect a company’s ethos and brand and to help in the ongoing war for talent and retaining staff. According to the report, this will renew the attractiveness of prime trophy headquarters space, particularly in core office markets, which will further widen the divergence in performance of prime and secondary office stock.
Sectors highlighted as particularly resilient include logistics, with requirements from the e-commerce sector seeing a significant uptick due to the restricted access to physical retail space during the lockdowns. In the long term, the annualised growth forecast for prime rents remains positive for all logistics locations, with further upward pressure in markets with severe restrictions on land and stock availability, such as London and Munich.
CBRE expects strong occupier demand to continue to generate robust investor interest, with some groups looking to increase their holdings of logistics assets and others seeking to enter the sector for the first time.
The onset of the pandemic has also failed to dent demand for multifamily assets in H1 2020 and the stable income offered by the sector has been the main reason behind the rising volume of investor enquiries. This is the case not only for mature multifamily markets in western and northern Europe, but also for emerging multifamily markets in southern Europe.
The pandemic has exacerbated challenges for sectors such as retail, with enforced shop closures further increasing levels of internet shopping.
As a result, CBRE expects a shift towards more flexible leases, higher vacancy levels and a continuing trend of yield expansion as the sector reconfigures. The Covid-19 pandemic has also presented unusually severe challenges to the European hotels sector, reflected in very low customer demand. Revived demand is expected to be driven initially by domestic travellers, with international travel taking longer to recover due to travel restrictions and quarantine requirements.
