Investors will continue to search for yield next year and the comparatively attractive returns real estate can offer will keep demand high, according to Savills, with a greater proportion of investors buying to hold, which will be limiting stock levels.
Eri Mitsostergiou, Director, Savills European Research, says:
“The question ‘are we close to the peak of the cycle?’ will be lingering for another year and as a result we expect flight to quality to prevail. There will be constant competition for prime stock, and we expect top-grade assets in the best locations to continue to attract multiple bids from investors with core/core plus strategies that are looking for safety. Core markets such as Germany, UK and France as well as the Netherlands, Spain and the Nordics will attract most interest.
“Investors will also seek diversification across sectors and geographies, as long as the assets are best-in-class. A rising number of players are expanding in the market segments that are positively affected by structural changes (technology and demographics) such as logistics, data centres, healthcare and living sectors. Local and intra-regional players who are already familiar with their markets, will be more competitive. Others will be following GDP growth and will be choosing markets which are later in the economic cycle and still growing (such as Portugal, Greece, Romania).”
Some less risk-averse players and developers will be looking for value add opportunities through new construction, refurbishment and re-purposing, Savills predicts. Development activity in undersupplied areas and around new transport hubs may rise. The repricing in the retail sector will bring more opportunities to the fore, especially in countries with higher consumer spending such as the UK, Germany and France.
Regarding the source of capital, Savills anticipates European investors will account for the largest cross-border investment flow, while US capital will remain active some slowdown of Asian capital inflows is likely to see as pricing becomes even more competitive.
Looking forward, Savills Research forecasts that the majority of core markets expect stable yields during the forecast period, while there is the most room for prime office yield compression in the Athens and Bucharest markets over the next 12 months. Warsaw, Lisbon, Budapest and Milan offices could also see some additional yield hardening.
Further industrial yield compression is expected across Germany, France, Portugal, Spain, Greece, Sweden, Czech Republic and Romania. In the retail sector, yield softening is expected in the sector notably in the UK, France, Norway, Sweden, Spain and Portugal, whilst it should remain stable in Germany, Netherlands, Italy and Poland.