According to CBRE’s 2016 European Outlook, commercial real estate across EMEA is forecast to outperform many other assets in 2016.
“The recent equity market volatility, driven by concerns over China, other emerging markets and oil prices, has focused many minds on downside risk, but there are good reasons to expect that European property will outperform other assets in 2016,” said Dr. Neil Blake, head of research and forecasting EMEA at CBRE.
“On balance most western European economies will benefit from the ongoing mix of low commodity prices and emerging markets’ weakness. A buoyant consumer is more important than booming exports to emerging markets.
“To put it in perspective, leasing is still in an early recovery in many European countries, and occupier demand will continue to improve as the economic recovery continues. On the capital side, continued, very low interest rates and the weakness of the euro currencies make property look relatively attractive regardless of recent falls in yields in some markets.
“The big downside risk is that emerging-market debt problems turn into another financial crisis that affects occupiers and investors alike. However, our view is that current signs point to a 1998-style, isolated emerging-market debt crisis rather than a re-run of the global financial crisis.”
2015 was a record year for commercial real estate investment sales in Europe but some divergent trends are starting to appear. Yields in the UK are set to remain stable and in continental Europe further yield compression is expected in the first half of 2016, with a bottoming out by year end. This will mean that investors will have to look more closely at occupier market fundamentals, rather than relying on a general fall in yields, to generate capital growth.
Although UK investment volumes have dipped recently, CBRE believes that 2016 should still be relatively buoyant. However, the momentum of investment does appear to have passed from the UK to continental Europe, which is set to have its best year ever in terms of investment volumes.
Across Europe in 2015, office leasing increased by over 15%, its best year since 2010. Vacancy rates, taking the big cities as a whole, fell at the fastest rate since 2007 and are expected to fall further in 2016. Also, new development starts are only beginning to pick up in a limited number of cities. This mix of growing occupier demand and limited new supply has produced increasing prime office rents in many markets, particularly in Western Europe and this looks set to continue in 2016.
There is clear polarisation in the retail sector, driven by changing technology and consumers’ spending habits. Prime high street in major cities and prime, destination shopping centres have seen low vacancy and rising rents while secondary centres have continued to struggle. This dichotomy will remain in 2016, but at least rising retail spending on the back of higher real disposable incomes will be of some benefit to the sector.
The rapid growth of e-commerce has led to surprising rates of rental growth in many markets. However, this growth is very uneven and limited to areas with a scarcity in development land, eg UK, Ireland and around the big German cities. In most other areas rents are being kept in check by new supply.
City logistics property however, i.e. last mile delivery assets, are increasing in popularity with investors as well as occupiers as they acknowledge their necessity in the e-commerce supply chain.
Development activity will increase in 2016, although it is expected to remain below the levels seen at the last peak in 2007. CBRE does not expect to see a significant uplift in speculative development however, with most new build over the next 12 months being predominantly “built-to-suit”.
2015 was the year that the hotels sector lost its “alternative asset” moniker and entered the mainstream.
This growth in both hotel revenues and profitability should continue in 2016 due to consumer confidence. Corporate confidence will also be positive and the hotels business should also see growth in average hotel rates. The ongoing competitive value of the euro against other global currencies is also a plus for many countries, however the sector does remain vulnerable to terrorist incidents and low oil prices may limit the number of visitors form the Middle East and other commodity producing countries.
Specialist markets (including leisure, health care, student and multi-family housing) have found increasing favour with investors in recent years as they search for yield and long-term income. While housing related investment will continue to attract investors looking for long-term secure income, yield compression in this segment could see some specialist investors move towards higher yielding operational assets such as leisure and healthcare.