BNP Paribas RE: European investment market to fare better than the occupational market in H2

Investment transaction volumes reached €264 billion in 2018, according to BNP Paribas Real Estate, only 1% below 2017. Q1 2019 investment totals (€43 billion) are lower, down by 21% over Q1 2018, although still above the 10-year average. European volumes for Q2 are expected to be higher than Q1.

Samuel Duah, head of real estate economics at BNP Paribas Real Estate, explained:

“We continue to hold the view that 2019 will witness the end of central bank policies of liquidity injections with the cessation of central bank support. As a result, nominal bond yields may remain flat over most of 2019 before rising. Tepid economic growth with lower likelihood of bond increase will continue to keep real estate returns in most markets in single digits and close to zero in some cases. As before, it is the prime segment with its historically low yields where returns will be most sensitive to relative changes in asset pricing.

“This is particularly acute with Europe’s volatile political situation, which may manifest itself into a flight to quality if populism (with its demand for a new settlement) grows stronger. Occupational outcomes are more uncertain than in investment.

“The twin engines of good occupational performance and stable capital markets are humming into 2019. Durability of occupier markets in the face of overt economic slowdown is remarkable but understandable when weakness is in one specific area of the economy. Even so, it is unrealistic to expect this situation of both real estate engines running perfectly to persist across the year. There are more uncertainties surrounding prospects for the occupational side of the real estate market.

“The occupational engine is likely to start sputtering first. Trade dispute induced slowdown is a marginal impact on primary real estate users in the services sector. Nonetheless many occupiers have already undertaken major relocation moves and others may end up being hesitant about real estate commitments while the economic outlook is hazy.”

BNP expects the economic slowdown to persist over 2019 and this is likely to translate into a more generalised slowdown in the occupational market. That is likely to manifest in marginal vacancy rate increases and slowing rental growth. BNP expects prime rental growth to be low for offices ranging between -1.20% to +5.0% over the forecast period.

Markets at the lower end include Budapest (-1.2%), Marseille (-1.0%), Dublin (-0.6%) and Manchester (-0.8%), while those at the upper end include Oslo (+5.4%), Berlin (+4.1%), Amsterdam (+2.8%) and Cologne (+2.7%). Logistics prime rents are projected to show a narrow but mostly positive range between 0% and 3% across Europe over the forecast period as and 3% across Europe over the forecast period as the market catches up with other real estate sectors.

Warsaw is the only market forecast to experience no growth in rents, while fellow CEE market, Prague, shows the strongest rental performance at 2.9%. Prime rents in European retail also present a narrow range, with greater propensity to negative outcomes than logistics. At the bottom, we see rents declining in all the German cities plus Central London over the forecast period. The strongest rental growth will be seen in Milan (3.1%), Dublin (3.3%) and Paris (3.5%) over the five-year forecast period.

james.wallace@realassetmedia.com