Structural factors likely to hold real estate markets down - research

Research firm Capital Economics is taking a more bearish approach to European property markets in 2021 than many of its peers, and is markedly less optimistic that European property markets will bounce back, despite expectations that this year’s second half will see a big rebound as the rollout of COVID-19 vaccines gathers pace.

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 researchers add 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.

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 is likely to weaken once restrictions are lifted, “so we don’t expect European industrial rental growth to accelerate substantially this year.”

Capital Economics expects the changes for offices to be more permanent.  Hence its third development to watch out for is for office rents to “underperform consensus expectations” over the next couple of years.

The update explains that although employment has so far held stable 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,” say the researchers.

Finally, 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.”