Despite expectations that economic activity will rebound in H2 2021 owing to the the rollout of Covid 19 vaccines, research firm Capital Economics does not think that European property markets will bounce back quickly.
In its latest Commercial Property Update the firm explains that property values did not fall as sharply as economic activity in 2020 and that structural, rather than cyclical, factors will dominate.
According to property economist Amy Wood, the firm has four key expectations for the European commercial property markets in the year ahead.
First, office and industrial yields will be lower by the year-end and this will affect non-core eurozone markets too. Yields are likely to be under upward pressure early in 2021, but “improving rents, low policy rates and supportive valuations mean that there is scope for yields to end the year lower, at least for industrial and office property.”
The firm adds that in CEE, a weaker outlook for office rents and a flight to safer core euro-zone markets will lead to continued divergence of CEE and Western European office yields.
Industrial yield compression set to slow
Second, the firm believes the rate of compression of industrial yields will slow in 2021, a reflection of its view that the pandemic has supported, but not dramatically changed prospects for industrial rents. Describing the increase in online demand during the pandemic as “temporary” the firm says this will wane once restrictions are lifted, “so we don’t expect European industrial rental growth to accelerate substantially this year.”
Capital expects the changes for offices to be more permanent and its third development to watch for is that office rents will “underperform consensus expectations” over the next couple of years.
The update explains that although employment has so far been maintained owing to short-time work schemes and is also expected to pick-up as economic activity rebounds later in the year, rents are not likely to rise because firms will review their space needs and an element of remote working will become permanent.
“We are notably more pessimistic than the consensus on the outlook for Berlin office rents, as this impact is compounded by a sharp rise in new supply, which is expected to increase the office stock by about 7% over the next two years,” the firm states.
Lastly, Capital Economics expects the rise in retail yields/fall in values to continue, partly because of the effects of tight virus containment measures and partly due to continued structural change. The firm expects the falls in value to be broad-based, despite a better outlook for consumer spending later in the year. “Meanwhile, given the weak prospects for rental growth because of the shift towards more online spending, we think that retail yields still need to rise further to entice investors.”