International capital is also still entering the market despite the 2019 lacklustre economic growth, which recorded 0.2% in Q3, while occupier demand for the office and logistics sectors remains robust amid broader depressed sentiment.
The general slowdown in the global economy has weighed on the eurozone. The added political uncertainty has also been a drag, while the fallout from trade wars hitting manufacturing and the impasse over Brexit weighing on private investment, says UBS.
Despite softening fundamentals, UBS says European office demand has been buoyant since 2014, with leasing volumes showing consistent increases. Leasing momentum has been strong in cities such as Brussels (+60%), Berlin (+27%) and Liege (+123%), although there are signs of momentum tailing off in other locations. Paris (-14%), Frankfurt (-28%) and Amsterdam (-34%) all saw volumes fall away despite expectations they would benefit from a post-Brexit boom, according to UBS analysis.
In its Q4 Real Estate Outlook report, UBS wrote:
“Some of these slightly downbeat city numbers could simply be due to a lack of quality space. Vacancy rates have continued to trend down as completions of new space (particularly in the prime segment) have been limited. According to data from JLL, the vacancy rate for major European cities stood at just 5.5% of units in 3Q19. German cities continue to see exceptionally low availability, with vacancy rates inn Berlin, Hamburg and Munich now south of 5%.
“Against this backdrop, it is hardly surprising that we are still seeing prime rental increases across most markets. Aggregate prime office rents grew by 2.6% YoY, while most major city centers also saw prime rental growth (see Figure 10). Liege capitalized on its very strong take-up to move rents on by 14%, while German cities Berlin, Cologne and Hamburg all saw double-digit growth. Rental growth was either positive or stable everywhere else, apart from Marseille in France where there was a slight 6% decline. Going forward we expect to see continued rental growth in the office sector, which will take over from yield compression as the main driver of returns.”
The retail sector continues to struggle for reasons that are well documented. The UK is the most affected as capital values have fallen significantly for retail warehouse, shopping center and high street assets. While secondary/tertiary assets have been hit much harder, there is also evidence of stress in the prime segment of the market. Of the 46 prime locations monitored by CBRE, just 4 saw rents increase while 19 saw them decline.
Weak secondary shopping centers now have one in five units empty, while prime retail parks are around 9%, says UBS, which adds that the retail warehouse sector will be more resilient going forward, due its high income returns, good accessibility and larger format units. “In light of this, it is hardly surprising we are seeing such high rental decline which we are expecting to continue at least until 2020. We do, however, believe there will be selective buying opportunities once this process is complete,” UBS adds.