DWS: robust European occupier markets and return of negative bond yields fuelling core real estate demand

Office, logistics and residential vacancy rates continue to fall, and good quality stock is in short supply, according to DWS in its revised European real estate market outlook. Retail is, of course, the exception. Over the next five years, DWS forecasts annual rental growth of:

  • 2.0% for office and logistics;
  • 2.7% for residential; and
  • 0% no growth on average across Europe, even for the best shopping centres, and rental decline within core Europe.

Simon Wallace, Head of Research, Europe, at DWS, explains:

“Perhaps the most significant change is our outlook for yields. It’s easy to forget that only seven months ago the ECB was bringing its programme of quantitative easing to a close. Today, the prospect of monetary tightening looks some way off. Long-dated bonds across much of core Europe are negative, bringing to the fore once more the relative attractiveness of real estate income. Prime yields are now forecast to fall further and to stay lower for a longer period of time.

“Over the next five years, we forecast European real estate to record an annual average prime total return of 4.0% – a 50 basis point increase compared to six months ago. As ever, this masks considerable differences between sectors and cities. In particular, logistics and residential and cities such as Paris, Madrid, Dublin and Warsaw are set to outperform the market.

“Even in markets with a less favourable outlook, we do not exclude the possibility of finding attractive investments. Positive employment growth, low vacancy and rising rents are set to remain commonplace across the cities we cover, opening up opportunities in emerging office submarkets, and for taking a more active asset management approach.

“Likewise, as lifestyles change, so do real estate needs. Whether it be flexible living or a desire for faster home delivery, we see structural factors supporting demand, from urban logistics to affordable housing and from hotels to student accommodation.

“In sum, the outlook for European real estate has improved over the past six months. While macroeconomic and political risks are clearly evident, in many ways this reinforces the attractiveness of a strong and relatively high income return. This is particularly true of core property in Europe’s major metropolitan areas. With a focus on both outperforming cities and major structural drivers, we continue to see attractive opportunities for investment in European real estate.”

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