The first quarter of the year seems a long way ago now, while the full horrors of the year’s second quarter are still unfolding in Europe’s commercial property markets. While almost any estimate as to how the figures will pan out is by definition highly speculative, the news won’t be good - and in the retail sector, indicators are for a disastrous showing. Yields are expected to remain under upward pressure all year.
A new report by Capital Economics paints a picture of the trouble ahead. According to the report, authored by Yasemin Engin, economic data was already suggesting that commercial property activity in Q1 was declining sharply, and as we know, had effectively dried up by the end of March. Prime rents had already flattened, and will now certainly remain ‘sticky’ for some time.
RICS survey results for Q1 also report sharp reductions in occupier demand across all sectors, with the retail readings more negative than at any time since the 2008/09 financial crisis.
The Capital Economics reports says that, not surprisingly, three-month-ahead-rental expectations for retail have plummeted, while more surveyors also expect rents to decline in offices and industrial.
Meanwhile, though European investment held up in Q1, RICS investment enquiries point to a drop in euro-zone capital value growth in the second half of this year. Given that the economic backdrop will be even worse in Q2, the researchers believe that investment activity could drop by around 40% this year and capital values could end the year around 10% lower.
As lockdown measures are due to be slowly lifted, it’s beginning to look like April may be the nadir in economic activity. Indeed, there were encouraging signs of a pick-up in footfall in the major German cities, though other countries are moving more slowly. And while some countries have started to ease restrictions on shops in the past few weeks, activity is still significantly below usual levels. Any recovery is likely to be slow, as consumers remain cautious, suggesting that activity will remain below its pre-virus levels for some time to come.
The implication of all this for commercial property is that things will get worse for all sectors in Q2, most notably retail. And after this, of course, performance will also depend on the strength of the recovery. In Europe, most expect the impact of COVID-19 to last up to a year, with Italians, unsurprisingly, the most pessimistic. This will influence behaviour in the short-term, with consumers avoiding shops and workers shunning the office. And the fact that turnover has fallen in Sweden, where most businesses have remained open so far, suggests that a loosening in lockdown measures will not directly translate into a sharp pick-up in consumer spending, let alone property activity.
Government support is also expected to be scaled down. Once shops are opened, depending on the country’s rules, they may not be eligible for government support, which the retail sector has been the biggest recipient of so far. This could in part explain why rents have not fallen as much as expected in Q1 but may also slow the pace of the recovery in some areas.
As lockdown measures are eased, the evidence from a range of indicators suggest that there will be further pain for all commercial property sectors, with weakness expected to be most pronounced in retail.
Capital Economics is forecasting euro-zone all-property rents to decline by 3% this year, with retail seeing a nearly 6% year-on-year contraction. And this assumes no second wave of infections, which could force lockdown measures to be imposed again, and would curtail recovery in all the sectors.
