Emerging Europe: Re-opening won’t stop values falling

The fall in all-property rents, dragged down by office and retail sectors, meant that annual capital value growth remained in negative territory in Q1, despite the surprise fall in yields. Looking ahead, while the faster pace of the vaccination rollout and fall in new virus cases should pave the way for a swift rebound in economic activity, the recovery in property values is likely to prove much slower. Indeed, despite the improved occupier outlook, structural headwinds from more online shopping and remote working will continue to weigh on the office and retail sector. In turn, we expect prime rents in these sectors to extend their declines this year, outweighing any rental gain in the industrial sector. And we don’t expect the dip in yields in Q1 to be sustained, as higher retail yields will push up all-property yields. As a result, all-property capital values are set to drop again this year.