The European Real Estate Outlook: what is the economic situation across the continent?

Thanks to an acceleration of the vaccination campaign across Europe, the continent has been given the biggest opportunity to exceed market expectations.

Thanks to the EU Covid-19 Vaccine Passport, travelling throughout Europe is now possible, without the need for widespread testing or quarantine measures. In the UK, a 10-day quarantine is however still required for those that are unvaccinated.

Whilst at the beginning of summer, many countries experienced a rise in Covid-19 cases, the vaccine programme appears to be having a notable effect on the severity of cases. Currently, across the world, around 650,000 new cases are being reported daily. This figure however is slowing down, giving hope to many that the vaccines have had the desired effect. This is notable when assessing the link between infections, hospital admissions and deaths, which now seems to have been broken.

With less than 60% of the European population vaccinated, the race for widespread coverage is still very much underway. Currently Spain leads the way in Europe with 70% of its population vaccinated, followed by the United Kingdom, France and Belgium.

BNP Paribas Real Estate’s research department predicts that GDP will return to pre-pandemic levels by the end of the year. What’s more, they are optimistic about the medium-term recovery as new policymaking has begun focusing on monetary and fiscal policy.

The effects of the pandemic may however still be felt within the future, the main concern is likely to be what happens when support measures for households and businesses come to an end.
 
The risk of having a global increase in inflation is a hot topic at the moment, with the mix of higher prices from temporary market factors, stronger overall demand, negative supply shocks and accommodative monetary policies pointing to this happening.

Although the European Central Bank might well extend its Pandemic Emergency Purchase Programme (PEPP) beyond 2021 and large rises in bond yields are not expected, there remains uncertainty over the debt that has been created by fiscal policies and what long-term impact it will have. 

Overall, €105.4bn were invested in Europe in H1 2021, which represents a 5% decline vs H1 2020, a result much smoother than what has been seen over the previous quarters.

In terms of commercial real estate, all countries have seen upward momentum, excluding France. The UK in particular has benefitted from its advanced vaccination campaign, and has once again found its place at the top of the podium along with Germany. Northern Europe in turn suffered the least from the pandemic and is experiencing a surge in investor interest. 

With the closing of borders and travel restrictions, foreign investment unsurprisingly took a hit with the outbreak of the pandemic. Over the last 12 months, ending with Q1 2021, foreign investment has seen a sharp downturn, but the situation appears to be improving for Q2 2021. Cross-border investment with Europe however was less affected (-18% over the last 12 months), as investors favoured the geographical proximity that the continent offered. 

The office occupier market in Europe is still very much feeling the effects of the pandemic, having experienced a 21% drop, year-on-year. As 2021 starts to open up far more than 2020, there are notable opportunities to be had across the market. Brussels and Luxembourg have for example seen a growth in volumes of +49% and +54% respectively.

In terms of the vacancy rate in Europe, this stood at 7.3% at the end of Q2 (+140 bps vs. Q2 2020). With the release of second-hand buildings and new building schemes, there are new drivers for vacancy increases. Here, Dublin was the city that experienced the sharpest increase, at +460 bps.

As stated in previous BNP Paribas Real Estate research documents, industrial and logistics has experienced very positive investment volumes, and this continues to be the case. What will remain to be seen though is how ongoing demand can be satisfied, as the shortage of products in prime locations leads to yield compression. Prime yields dropped across Europe during H1 2020 by 25 bps on average over the last 6 months. Further yield compression is anticipated as competitive pricing remains tough.

In order to combat supply chain disruptions, some companies are looking to create dedicated logistics networks, which aim to minimize costs and move good faster. This issue is proving to be crucial to the logistics market in regards to take-up, particularly at local and regional levels.

The space used for logistics purposes is also changing, as during the pandemic, some companies chose to on-shore some of their manufacturing processes. This has resulted in an increased demand for industrial space to permit this activity, changing the use of such assets.

In terms of the logistics occupier market, Germany has set a new Q1 record. The sector has come out of the crisis in a better position than all other economic sectors and has benefitted from structural adjustments which have generated additional demand.

For the UK, exceptional volumes have been recorded for three quarters in a row, meaning the country is in a very strong position. This has been boosted by the growth of e-commerce and supply chain development.

Poland remains the most dynamic market in Europe for logistics, where a record volume of transactions at 1.16 million m2 in Q1 was reached. Demand is robust in all majors sectors including e-commerce, 3Pls and manufacturers.

Online shopping has become a much more accepted practice as a result of the lockdowns imposed by the Covid-19 crisis. This has meant the industry’s structure has much evolved, and major operators have become increasingly competitive when it comes to price and delivery times. This has knock-on effects for labour and transportation within the sector.

As a consequence, the retail sector is facing many challenges, including having to cope with excess inventory which represents a significant cost.

Depending on the type of goods, retailers are experiencing differing levels of struggle. Fast fashion (excluding to some extent children’s apparel) has witnessed notable drops, in particular for those like Primark who do not have online shops.

Food delivery which was much called upon during the various lockdowns has continued to receive solid revenues. Now however, the challenge of maintaining margins has become ever present, as the cost of Covid safety measures drive costs up.

For the location of retails stores, prime locations are expected to suffer less than secondary ones. Liquidity for prime assets should remain stable and only a slight adjustment in prices is expected in the main high-street locations.

This may offer an opportunity to investors who may choose to reenter the market if decompression of prime yields occurs in some locations.

Read the Europe CRE 360 report here