European Commercial Property
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European Commercial Property

Euro-zone Commercial Property Outlook

Euro-zone Commercial Property Outlook

Sector fortunes to shift

While the Delta variant has slowed economic activity in other parts of the world, this has not yet been the case in the euro-zone, and we are cautiously optimistic that the bloc will continue to grow. This will support the property market upturn, albeit offices and retail face structural challenges that will limit the rental recovery. Stronger rental prospects for industrial mean we think that the sector has the most scope for yield compression in the near term, though strong demand for prime assets should allow office yields to edge a bit lower too. However, further increases in yields will make some retail assets look increasingly attractive by year-end, prompting small yield falls in the next few years. The upshot is that industrial is expected to outperform over the next couple of years, but stronger capital value growth beyond 2022 will result in retail returns emerging as the strongest.

16 September 2021

Euro-zone Commercial Property Outlook

Economies reopening but headwinds remain for property

The easing of virus restrictions has brightened the economic outlook and prospects for occupier markets. And with rises in inflation expected to be temporary, we think monetary policy will remain highly accommodative over the next five years, keeping the environment supportive for property yields. However, the structural headwinds in the retail and office sectors mean that the rental growth prospects are poor outside of industrial. Further, despite looking undervalued, we think that retail yields need to rise further before assets look attractive. As such, we expect only a weak recovery in all-property values over 2021-2025. Within this, industrial will be the standout performer.

18 June 2021

Euro-zone Commercial Property Outlook

Pandemic hit mild by past standards, but recovery slow

Euro-zone prime property will likely get off more mildly than many expected at the start of the pandemic. We forecast another small fall in all-property capital values this year, with yields holding steady and rental values extending their declines. That said, the cumulative drop in retail values will be far more severe, with the correction materially worse than over 2008-09. And the recovery will be slow, even once economic activity returns to normal. This reflects a faster transition to online shopping and an accelerated adoption of remote working, which will weigh on the retail and office sectors. As a result, industrial will continue to be the standout performer over a five-year horizon.

18 March 2021
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Euro-zone Commercial Property Outlook

Structural factors to hold back office and retail recovery

Although the near-term economic outlook remains weak, vaccine developments pave the way for a rebound in mid-2021. However, we think that the rental recovery in property markets will be more gradual. This reflects that structural headwinds remain for retail and office property because of the growth of ecommerce and an accelerated adoption of remote working. In contrast, industrial rents will be supported by structural factors and the recovery in economic activity. Meanwhile, although investment has fallen sharply, there has been little sign of a repricing, at least outside of the sectors hit hardest by the virus such as retail. Combined with supportive property valuations, we think that there is scope for all-property yields to edge down over the coming years. As such, following a less steep drop in all-property capital values than previously expected of about 4% y/y in 2020, we now think that values could return to pre-virus levels in 2022.

10 December 2020

Euro-zone Commercial Property Outlook

Slower recovery in values given weaker office outlook

As widely expected, Q2 brought a range of disappointing data, from plunging investment volumes to further falls in retail rents. And while property values outside of retail have generally held up so far, fragile occupier demand and rising vacancy suggest that it is just a matter of time before weakness in activity weighs on them too. Beyond the immediate hit from COVID-19, we expect a shift to more remote working will delay the recovery in the office sector, in contrast to our previous view that values would rebound. Meanwhile, we think that the only gradual recovery in consumer spending and growing popularity of ecommerce will continue to act as a headwind for retail. In comparison, we expect the drop industrial values this year to be more than regained in 2021. The upshot is that industrial is set to continue to outperform over the next five years.

18 September 2020

Euro-zone Commercial Property Outlook

Property values will fall sharply, but won’t reach GFC lows

Thin deal evidence and market uncertainty has meant that the disruption from the virus has been slow to feed through to property values. However, significant falls in economic activity in H1 and continued uncertainty about the outlook have weighed on occupier demand, which means a repricing of property is inevitable, particularly in southern European markets. The economic recovery underway will support demand going ahead. But economic activity is only likely to pick up gradually. This is especially the case in the consumer and tourism sectors, which will limit the recovery in retail values. That said, ultra-loose monetary policy will keep bond yields low, supporting property valuations. As such, we think that there is scope for office and industrial yields to more than reverse their 2020 rises in the coming years.

19 June 2020

Euro-zone Commercial Property Outlook

COVID-19 to hit property values by at least 8% in 2020

The ever-changing economic effects of COVID-19 mean that the impact on real estate markets is highly uncertain. It is clear that the sharp contraction in economic activity and deterioration in sentiment over the first half of the year will weigh heavily on rents and put upward pressure on property yields across the board. That said, if the virus is brought under control, we expect rental growth to bounce back next year and, aside from retail, yield rises will be more than reversed. However, a weaker recovery can’t be ruled out, which poses downside risk to the outlook.

20 March 2020

Euro-zone Commercial Property Outlook

Lower yields to support capital values

We expect a further slowdown in euro-zone economic growth in 2020 to weigh on rental growth. However, with interest rates set to be cut next year and remain at this low level, there isn’t likely to be much upward pressure on bond yields over the following years. As a result, we think that there is scope for office and industrial yields to fall further, supporting capital values over the next few years. But, given the bleak outlook for the retail sector, retail yields are still expected to rise. Overall, we think that returns will slow sharply across all sectors over the coming years, with industrial returns outperforming.

5 December 2019
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