All UK offices are already seeing decompression and by 2020, all European office yields will be either stable or expanding. Logistics yields have a slightly longer stay of execution on decompression with most remaining stable in 2019 and some still falling; the strongest compression is occurring in France and in CEE markets.
Retail is a more mixed picture with compression still ongoing in Vienna while Berlin, Munich and Prague will move from compression in 2019 directly into increases in 2020.
Samuel Duah, head of real estate economics at BNP Paribas Real Estate, explained:
“These are outliers, as most European retail markets are poised for increases in yields having ceased compression. We still hold the view that rental increases will not fully mitigate yield decompression on capital values. Consequently, all sectors and the majority values. Consequently, all sectors and the majority of markets will see capital value decline in 2019 and 2020.
“For offices, we think there is still some growth left in French markets and CEE markets. Over the forecast period, office capital growth will be most robust in Berlin, Oslo and Vienna; all above 2% pa. Logistics will see the strongest capital growth in Vienna (1.8% pa), Greater Paris (2.6% pa) and Prague (3.5% pa). Single-digit returns are inevitable With such low capital growth, returns will inevitably be in the single-digit territory and come from income.
“Overall total return from the office market is expected to average 5.5% pa over the five-year forecast period and driven more by income (+5.2%) than capital growth (+0.6%), reflecting the late stage in the investment cycle. It will be enough for the investment market to see out 2019 in better shape than the occupational market.
“For offices, we expect prime returns will go from 1.7% (Dublin) to 6.5% (Oslo). Logistics will exhibit the greatest spectrum in prime return, ranging from 3.4% (Munich) to 9.0% (Prague), with retail the narrowest range at 1.7% (Frankfurt) to 5.2% (Helsinki). Returns remain front-loaded in the forecast, reflecting the fall-off in capital values over the later part of the period.”
Three potential triggers
BNP cites three potential risks to its above forecast. They are:
Global Economy: The world economy is looking at a particularly binary outcome at present. Resolution of the China-US trade dispute will result in a positive upside to the global economy, which will do much to restore the confidence of real estate occupiers. Conversely, it could go the other way and erode confidence further, leading to a downturn .
Bond Yields: Bond yields are back under pressure. For real estate that could see yield stability prolonged further if it persists.
Real Estate Development: Vacancy rates have fallen to lows but if speculative supply delivery accelerates beyond the capability of the occupational market to absorb, a situation of oversupply may occur.