Rental recovery picks up pace

The recovery in euro-zone commercial property values picked up in Q3, supported by a small fall in yields and an improvement in the pace of rental growth. While retail rents held steady, the quarterly rise in both office and industrial rents was the largest since 2019 Q4. Demand for prime assets and low interest rates will continue to support the property sector. However, with economic activity expected to slow over the next six months or so, and the outlook for the retail and office sectors still clouded by structural change, we think that the property recovery will struggle to maintain its current pace.

16 November 2021

Dutch industrial rental growth catching up with EZ

A healthy occupier backdrop and a shortage of supply should allow prime industrial rents in the Netherlands to continue to grow at a steady pace over the coming years. As a result, after years of underperformance, our forecasts leave Dutch rental growth in line with the euro-zone average.

11 November 2021

How pandemic changes will affect European cities

Europeans are returning to cities, though the return to offices has been much slower and this has had negative effects on city retail. Looking ahead, weaker demand for office and retail will weigh on performance in cities with large concentrations of these assets. However, prospects are better for cities that are attractive to more than just workers and that can fill the gap left by excess office and retail with other property types where the outlook is more positive. The cities which we think will perform best in the coming years as a result are Stockholm, Paris and Berlin. In view of the wider interest, we are also sending this European Commercial Property Focus to clients of our UK Commercial Property service & UK Housing service.

2 November 2021
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Running into troubled waters

Supply chain problems will slow the recovery and keep inflation above target until around the middle of next year. Beyond that, however, the economy should get back on track. After regaining its pre-crisis level later this year, output is likely to converge with its pre-pandemic trend. Meanwhile, we do not expect significant second-round effects from the recent surge in prices and think wage increases will remain quite modest. Headline inflation is likely to drop back below the ECB’s target by the end of next year, as energy inflation turns negative. So while the ECB will end its emergency PEPP purchases next March, it will step up its regular asset purchases and leave the deposit rate at -0.5% until around 2025, which is a lot later than financial markets anticipate.

Why are prime industrial rental values not taking off?

Despite strong demand, we think that high capital values have kept development profitable and have prevented an acceleration in euro-zone prime industrial rental value growth. However, as capital value growth slows there is a risk that some markets will see more upward pressure on rents.

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

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.

Industry holds back otherwise strong recovery

This week provided yet more good news on the euro-zone, with case numbers falling consistently in some countries, vaccine rollouts on track, and both the survey and official data suggesting that the economic recovery continues apace. But international tourism is still hampered by travel restrictions and industry remains a weak point, as supply constraints weigh on auto output in particular. Indeed, data out next week are likely to suggest that euro-zone industrial output contracted in Q2.

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