UBS: Europe showing mixed signals of continued occupier stress and pockets of revival

In a somewhat mixed assessment, UBS says survey data suggesting momentum is reviving somewhat, particularly in the services sector. However, there are also signals elsewhere that the negative sentiment may be seeping over into the occupier markets, however, leasing volumes were strong in 1Q19, up 9% on the previous year and returning rolling annual office leasing levels to growth.

The biggest driver of this was less core office markets, says UBS. Stockholm saw rolling annual take-up surge by nearly 400%, while regional areas in the UK and Netherlands also posted strong results.

UBS explained:

“Portugal has been a key focus recently and both Lisbon (+27%) and Porto (+22%) saw continued strong momentum over the last 12 months. Central London has seen reasonably buoyant demand considering the market’s exposure to international services and uncertainty surrounding their post-Brexit status.

“Take-up in the aggregated submarkets was more or less comparable with the previous 12 months, showing just a -1% decline in volumes. However, much of this has been driven by take-up from serviced office providers (such as WeWork) as well as existing occupiers leasing space in newly completed schemes.

“At the other end of the spectrum, Berlin saw a slight moderation, with leasing falling -6% when compared with the previous 12 months. Two of the mooted financial successors to London, Paris (-11%) and Frankfurt (-26%) had fairly weak years in terms of leasing, suggesting banks might not be rushing to abandon the UK capital just yet. Anecdotally, there are suggestions it is likely much of the demand from international finance will leave the continent altogether rather than operate from smaller financial centers within Europe.

“Prime office rents in EU-15 countries grew by 3.3% in the year to 1Q19. There were no recorded decreases in office rents in 1Q19, with all of the centers under coverage either seeing no change or rising values. This indicates the strength of demand for prime office space remains very high in most centers. Portugal continued its impressive momentum; Porto saw the highest prime rental growth (+29%) while Lisbon (+12%) also performed very well.

“Berlin continued its transition to a tech center with rental values growing 11% YoY, while Madrid also saw rents increase by 10%. More established markets continued to see healthy growth with Munich and Dusseldorf both seeing rents climb by 4%. Central London saw rents edge up 2% for prime assets, although this potentially belies the weakness in demand for secondary space.”

UBS added that the retail sector continues to be challenged by changing consumer habits and retailers are struggling to adapt their business models to suit. This trend varies greatly by country. Broadly speaking, northern European countries are facing greater pressure than Southern Europe. These regional differences are correlated with demand fall and rental decline in countries with high online penetration, and with sustained demand for less affected countries, respectively, UBS added.

UBS concluded:

“Prime high street rents declined over the year in Bristol (-9.1%) and Edinburgh (-2.1%) as they did in Amsterdam (-3.2%) and Rotterdam (-2.8%). Conversely, rents grew by 5.9% in Rome, 7.7% in Milan and an impressive 25% in Lisbon. Overall, the picture was more negative than positive, with aggregate EU-15 prime rents declining by -0.7% to 1Q19.”

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