The experts are Cauta Capital discuss the challenges, risks and opportunities of the European commercial property market in 2019.
Commercial real estate remains a strong market across Europe, and its resilience will continue through 2019. Prices in major cities across the continent have doubled in many cases since 2013 and are now well above the previous peak in 2008.
However, challenges face the sector, particularly from the economic impact of changing political influence. There will be swings both up and down for investors, and it is not possible to predict with total certainty how the market will play out for the next 12 months.
While some may be expecting market corrections due to historical patterns, this is not necessarily always the case. So, you should be making careful analysis of the risks, challenges and investment opportunities across Europe.
European commercial property market still safe for investors
Cauta Capital’s CEO William Abundes says: “Europe is still regarded as a safe haven for investors, and the market will remain competitive throughout the next 12 months. We expect to see offices in central business districts dominate the commercial sector, and equally expect a strong showing within logistics.”
Prime office space will remain a top priority for investors, with the focus on cities in South Europe and Germany in particular. Transport and storage are doing best in Eastern Europe, in places such as Romania and Poland.
While the average prime office yields are low across most of Europe, the assets are still a top pick for investors this year. This is because of the positive prospects for rental growth, along with the positive yield spread over interest rates. It is worth noting that the average rates of vacancy in Europe are also low at 5.9%. In particular, cities such as Stockholm (3%), Munich (2.5%) and Berlin (1.4%) have very little office space available at all. This will further boost rents in Europe, which are expected to continue to rise throughout 2019.
What are the risks facing the European commercial property market?
Commercial real estate across Europe has two major risks. The first is political. With the increase of populist parties across the continent, we can reasonably expect see some dramatic shifts in economic and trade policy. The biggest of these risks comes with Brexit, which threatens rents in the City of London and the Docklands area in particular. It also poses challenges for financial services in the UK as a whole.
While Brexit affects office property in the UK, it is boosting occupation levels in commercial property in cities including Paris and Frankfurt. Other political impacts include Catalonia’s declaration of independence, which raises questions over commercial property in Barcelona. At the same time the Government in Italy is in dispute with the EU over budgets, and this has decreased foreign investment in Rome and Milan.
This move towards populism in many countries means a difference in the way economic growth is administered. Traditional policy tools are not always being used, which renders the future more uncertain. It is also pushing large-scale infrastructure building projects, including the Grand Paris project in France. This will add 68 new stations and new 200km long track surrounding Paris. Stage 2 will complete in 2024, offering investors long-term opportunities.
Moving away from politics, the other risk surrounds interest rates. It is expected that the European Central Bank and the Bank of England will raise base rates to 1.75% and the refinancing rate to 1% by the end of 2020.
European GDP growth softening
According to the European Property Outlook 2019 report from Knight Frank, the turbulence experienced in Europe, along with the effects of the US/China trade war are combining to increase general worldwide volatility. This softened Europe’s GDP growth during 2018, and the European Commission expects this to continue through 2019. But, country by country, there are significant differences in performance.
Prime commercial property yields by sector:
- Highest retail yield and (rent Euro/sq m/annum)
- Moscow 10.25% (3,061)
- Bucharest 7.25% (840)
- Budapest 4.75% (1,350)
- Warsaw 4.10% (1,200)
- Brussels 3.75% (2,000)
- Highest office space yield and (rent Euro/sq m/annum)
- Moscow 9.75% (695)
- Bucharest 7.25% (222)
- Budapest 5.15% (294)
- Prague 4.75% (264)
- Warsaw 4.70% (288)
- Highest logistic space yield and (rent Euro/sq m/annum)
- Moscow 11% (65)
- Bucharest 8.25% (48)
- Budapest 7.25% (51)
- Prague 6% (50)
- Vienna 5.3% (72)
(Source: European Property Outlook 2019, Knight Frank)
Rents rising for industrial and office properties
Industrial and office rents are rising across the board. For example, in the UK, industrial rents are rising by 3-4% per annum, due to the increase in online retail. Lack of supply also contributes to this, thanks to many sites being turned into real estate. Similarly, industrial rents are rising in parts of Germany and France.
This means that yields are compressing to record lows. In many big European cities, prime office yields in the central business district (CBD) areas are falling to between 3% and 3.5%. Prime industrial yields are hovering between 4% and 4.5%.
Developers and investors are seeking to add value by the redevelopment of older office buildings in the CBD areas. It’s also worth looking for areas where the higher yields lie, such as Russia, Bucharest and Budapest. Other areas to consider investing are adjacent to regions currently undergoing regeneration, and bursts of new infrastructure. These include Solna in Stockholm, Waterloo in London, Montreuil in Paris and Amsterdam ArenA, among others.
Cities fighting for international investor interest
Cities with excellent universities, job markets and strong economies are also of interest to investors, including Leeds, Manchester and Cambridge in the UK, Leipzig in Germany and Malmo in Italy.
William Abundes says: “Cities across Europe are competing for both international and national investment. This will speed up throughout 2019, and we can expect to see cities in which market players and local government work together to develop new sites and redevelop existing commercial space, to stand out from the crowd.
“We are also witnessing a sea change in space management, due to the growth of the on-demand economy. Investors and occupiers continue to demand easier access to services, more flexibility and personalised options. In many cases, investors are becoming operators so that they can maximise the use of their assets.”
Retail commercial property undergoing major change
The retail sector is more complex as the world continues to adjust to the rise of multi-channel retailing. For example, figures suggest that the Internet will be responsible for almost a third of UK retail sales over the next decade, rising from 17% in 2019. This strongly suggests that retail closures and adjustments to the sector will continue throughout northern Europe.
However, investors looking further ahead could begin to see worthwhile opportunities in retail assets such as convenience stores and out of town shopping centres. Town centre buildings redesigned and repurposed as multi-usage sites will also become more common.
There is value for investors within the European commercial property market. Office and industrial rents will increase further in high tier cities. However, investors should show caution in some areas due to the current economic and market cycle. It is not yet known whether 2019 represents the peak in market pricing, and it is possible that prices will be corrected, which will lead to excellent opportunity for long-term investors.
William Abundes adds: “While political and economic upheaval are affecting markets across Europe, investors can be sure that commercial property offers relatively safe opportunities. It remains to be seen exactly where 2019 is in the market cycle, and whether prices are peaking. Either way, there are plenty of opportunities available to investors in many countries.”