Head of EMEA Research
As we move towards the busy 4th quarter trading period, this report highlights some of the major trends seen in European commercial property markets so far in 2016. The big event in the political sphere was undoubtedly the surprise result in the UK referendum but excluding the UK, the demand for real estate in Europe has remained strong.
Of the 35 largest non-UK office markets in Europe, prime office yields have continued to fall in 22 of them so far in 2016. Yields have remained stable in all of the rest except Oslo which has seen a small rise. Similar trends are seen for retail and industrial and logistics properties.
The increased attraction of prime property is linked to the policy adopted by the ECB over the past two years. We now have negative short-term policy rates and very low long-term government bond yields. This has pushed investors towards alternative “near bond-like” assets which offer some characteristics of fixed income and security. Prime property goes some way to fitting the description and steadily rising rents and falling vacancy have helped to make the case.
In the short-term, UK prices and volumes look to have been hit by the referendum result although the UK economy has been surprisingly resilient. Judging the short-term impact is difficult enough because of a lack of transactional evidence over the summer months. Assessing the longer term impacts in the current information vacuum over the UK’s eventual long-term relationship with the EU is very difficult indeed but no doubt it will be a recurring topic over the coming years.
The pattern of office leasing across the European markets continues to reflect the economic situation: positive but slow growth with some marked differences from place to place reflecting offsets in the timing of cycles; all tempered with a degree of caution from the lead-up to, and result of, the EU referendum in the UK.
The majority of retail markets across Europe have seen positive retail sales volume growth so far in 2016 and the EU average growth rate has been a healthy 3.2% (6 months to May-July annualised). The fastest growth has mainly been seen in Central European countries although Spain and Portugal are seeing cyclical bouncebacks. Perhaps surprisingly, the UK is also amongst the leaders despite referendum-related worries.
The industrial & logistics markets have performed well in the first half of the year and appear to have been relatively unscathed by Brexit concerns and other political turmoil in Europe. This was also the case in the UK, where logistics occupier demand was surprisingly strong amidst a general pre-referendum slowdown.