As 2019 comes to a close Vivienne Bolla and Souad Cherfouh look ahead to the key themes that will shape the European real estate markets in 2020 and beyond.
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Opportunities in European real estate are being shaped by expectations of a lower-for-longer interest rate environment and downside risks to the growth outlook. In light of this, appetite for good quality real estate backed by sustainable income streams is likely to remain strong. But investors should be cautious about taking exposure to income risk and only deploying intensive asset management or development strategies selectively.
Appetite for good quality real estate backed by sustainable income streams is likely to remain strong
Given the balance of risks, it is appropriate to focus on prime locations over secondary, including those with clusters of talent and value-adding economic activity, and firms able to leverage agglomeration effects. Paris stands out as a magnet for global talent; Stockholm, Berlin, Amsterdam and Copenhagen have world-renowned clusters in digital and biotech fields, while Munich, Frankfurt and Dublin compete globally with vibrant activity in financial, automotive, information and communications technology, media, cultural and creative industries and engineering sectors.
While pricing in prime markets looks high by historical standards, most markets in Europe look attractive on a risk-adjusted basis given the favourable relative pricing implied by low government bond yields. In general, logistics and office markets look more attractive than the retail sector.
Investors increasingly favouring strong assets in the best locations
Most European logistics markets have been boosted by the transition to e-tailing, but the stand-outs appear to be the Randstad, Paris and Copenhagen. Strong occupier markets are likely to drive office performance in Paris, where development constraints suggest scope for sustained rental growth. Prospects in Copenhagen, some German cities, Amsterdam and Lyon also look positive. While there has been less re-pricing of retail assets than in the UK, we expect it to emerge in non-core locations, with investors increasingly favouring strong assets in the best locations.
Looking ahead, we expect more investors to be asking what their real estate allocations can achieve beyond financial returns. Investors are increasingly concerned about the environmental, social and governance (ESG) impact of their investments and searching for opportunities to improve Europe’s infrastructure and deliver a societal benefit. Adopting a long-term, direct-owner mindset is critical.