UK & European Real Estate Markets in 2019: Five Big Themes

Today’s Big Theme focuses on occupier markets. The outlook for the three core sectors continues to diverge.

2. Occupier markets holding the line

Starting with offices and – inevitably – the rise and rise of coworking. 

  • Flexible offices will continue to reshape office portfolios, beyond the coworking model. 
  • In a sample of 20 major office markets, there is now an estimated 40 million square feet of space dedicated for use by flexible office providers, up four-fold since 2015, says PGIM Real Estate. But, remember this remains just 2% of global office stake. 
  • However, the model remains untested in recessionary environments and performance of providers will come under scrutiny if downside economic risks are realised.   

In logistics and industrials, tight market conditions are expected to persist throughout 2019.

  • Vacancy rates have remained low and stable across Europe, although several markets, such as Spain, the Czech Republic and the UK witnessed a modest rise in vacancy in the second half of 2018 due to increasing speculative development, notes CBRE
  • CBRE says:“We expect supply-constrained locations to continue to deliver rental growth, with new logistics hubs also emerging across Europe in response to labour and land shortages. City logistics markets will evolve further, with light industrial and other urban ‘infill’ warehousing sites playing a crucial supply-side role for these opportunities. At the same time, market players will strengthen their focus on city logistics solutions, which will increasingly cater for food and grocery deliveries and therefore need to include temperature-controlled facilities.” 

Meanwhile, retail continues to attract most negative sentiment, as the sector comes to terms with the severe oversupply of physical space in a new consumer environment

  • Landlords will seek to get a grip with the problem of empty legacy shops by repurposing units into residential, hotels and warehouses/fulfillment centres, says Savills.  
  • UBS argues that the sector’s downward spiral will last well beyond 2019.“2018 appears to have been a turning point for the retail sector. The big question is whether this will be a short-ish lived correction… or whether this is the start of a long and painful downward spiral. Unfortunately, we’ve seen little to convince us that it will not be the latter.”
  • While retail availability remains low– aided by an absence of new supply – vacancy rates have risen to their highest level since the depths of the global financial crisis.
  • Data from the listed sector suggest retail values are going to come under increasing pressure in 2019. Global retail REIT values have now fallen about 15% since mid-2016 – the gap is most pronounced in Europe and the US.