Real Estate Research
Continental European Property Market Commentary - March 2014
Although the eurozone still faces challenges, all the major economies are now growing. The key has been a widespread rebound in business and consumer confidence as fears of a currency break-up have receded.
- Although the eurozone still faces challenges, all the major economies are now growing. The key has been a widespread rebound in business and consumer confidence as fears of a currency break-up have receded. Yields on 10 year Italian and Spanish government bonds now stand at 3.2-3.3%, half their level at the height of the sovereign debt crisis. Consumers have benefited from improved employment prospects and a sharp slowdown in inflation to 0.5%, due to the appreciation of the € against the $ and to falling commodity prices. Schroders expects the eurozone to grow by 1-1.5% through 2014-2015 although growth in export-led economies such as Germany and Sweden should be significantly faster. While there are concerns about deflation, we believe the risk is small and, critically, there is no evidence that purchases are being postponed in anticipation of lower prices.
- Although agents’ data show a general increase in office lettings, we estimate that net absorption is still close to zero in most European cities. The exceptions are Germany, Norway and Sweden where companies are expanding and require extra space. We expect Berlin, Hamburg, Munich, Oslo and Stockholm to lead the upturn in office rents this year, followed by Brussels, Paris and the other big German cities in 2015-2016. We believe that high levels of vacancy in Madrid and Barcelona will delay any upswing in Spain until 2017 or later.
The upturn in consumer confidence has started to lift retail sales volumes in most countries, including Spain and Portugal. The main exceptions are Italy and the Netherlands which continue to suffer from rising unemployment. Over the next couple of years, we expect shopping centre rents to be flat as retailers invest in improving their on-line offer and hold back on opening new stores. In general, we prefer retail schemes which are likely to be relatively internet-immune such as convenience / discount stores, DIY and furniture
units. We also see growing demand for flagship stores in big city centres and tourist destinations.
- Large logistics warehouses are relatively quick to build and there are already signs of an upturn in development in the core markets of Benelux and Germany, which is likely to keep rents in check. Accordingly, we favour smaller industrial units close to big cities where supply is more constrained.
- The total value of investment deals in continental Europe rose by 10% in 2013 to €120 billion, suggesting liquidity is getting back to normal (source: RCA). Although data is not yet available for 2014, the first few months have seen a number of major transactions involving both domestic investors (e.g. Carrefour buying back a portfolio of hypermarkets in France, Deka acquiring the Neumarkt shopping centre in Köln) and foreign investors from the USA and Middle East.
- The weight of capital means that prime office and retail yields in the centre of Paris, the big German cities and Stockholm are now 4.0-4.5%. Although this may be justifiable in Munich or Stockholm which have good rental growth prospects, we think that prime yields in the centre of Paris and many German cities look expensive. Alternatively, we think that better value in the office sector can be found on the edges of the main business districts in the big cities and in the centre of certain regional cities such as Lille, Lyon, Hannover and Mannheim where prime yields are between 5.5-6.0%. Similarly in the retail sector, we favour smaller grocery anchored schemes and big box parks where yields are higher, in the range of 6-7%. While many international investors are becoming increasingly bullish about Spain, we do not think that yields there adequately reflect the risks associated with high vacancy and a household sector which is still heavily in debt.
- We expect total returns on average investment grade European property to average 7-9% per year between end-2013 and end-2017. Capital values should benefit from yield compression in 2014-15 and from steady rental growth from 2015/2016 onwards.
The main upside risk in the short-term is that the inflow of capital from Asia and the USA results in a fall in yields, boosting capital values in 2014. It is also possible that rental growth resumes slightly sooner than we are anticipating. The main downside risk is that the sovereign debt crisis could re-ignite if governments fail to meet targets to cut their budget deficits.
The views and opinions contained herein are those of Schroder Property Investment Management Limited and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisors only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Property Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Any forecasts in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and may not be repeated.
Use of IPD data and indices: © and database right Investment Property Databank Limited and its Licensors 2014. All rights reserved. IPD has no liability to any person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any of the information which may be attributed to it.
Issued by Schroder Property Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1188240 England.
Authorised and regulated by the Financial Conduct Authority
For your security, communications may be taped or monitored.