Inflation and interest rates: circumstantial changes
Inflation from December 2020-December 2021 experienced significant change but as Richard Malle points out, “The numbers are big but circumstantial. There is inflation which goes above 5 or 9% between Germany, the UK, Spain, USA and Poland. France however is at the bottom of the table with 1.28% inflation.”
Due to the current climate in which we find ourselves, it is important to look carefully at core inflation, which is inflation that is not affected by volatility. When considering inflation rates in France, Richard Malle points out that, “Inflation is controlled in France, with a core inflation of 2%. This means we are not in a situation like in the 70s or 80s where the price of goods and services suddenly rose, affecting companies’ margins.”
We will however have to become accustomed to inflation which sits around 2%. As Richard Malle explains, “In 2022, inflation should sit around 4-5% in the US and the UK. In France, it will remain at around 2.5%. We will however have to get used to, over the next 10 years, an inflation rate around 2%, which is more than during the 2010s, where it stood at around 1%.”
In terms of the future, the Central European Bank has spoken about controlling inflation and ending ultra-expansionary monetary policy. At the same time however, the financial conditions are going to remain very accommodating.
Capital flows: foreign investment in Europe remains strong
In 2021, foreign investment represented half of the capital invested in Europe, with more than €130 million invested, meaning a 13% progression from 2020. As Olivier Ambrosiali points out, “Foreign investors continue to dominate the market, particularly driven by the returns from real estate but also assets that are more diverse.”
For the second year in a row, Asian investors have reduced their investment into Europe and now represent 8% of foreign investment, particularly when it comes to logistics. Olivier Ambrosiali explains that, “We are however experiencing an increase in North-American investors, as they continue to invest heavily in Europe, increasing investment by 50%, particularly focused on logistics and offices.
Investment volumes in the real estate sector reached €272.7 million across Europe in 2021, an increase of 15% from the previous year and equal to 2019 figures, which demonstrates an excellent performance.
This increase is not equally spread out across Europe. Denmark and Sweden for example broke records with the doubling of their annual investment volumes. The UK and Ireland have also witnessed an increase, with the UK taking back its place as the leader of investment volumes in Europe, boosted in particular by North American investors. Ireland on the other hand has benefited from German interest for core operations.
France, the Netherlands and Belgium on the other hand have all seen a decrease in foreign investment.
Beyond simple transactions
Investment by asset type
In Germany and France, the office still remains the leading asset type for investors, whilst in the UK the market is more balanced. In France we saw the biggest increase in logistics interest which now represents a quarter of investment, up from 15% last year.
Prime office rates continue to evolve
After a certain amount of stability in 2020, a number of markets have recorded evolutions in their prime rates. Most markets have experienced compression, particularly Germany where the four major cities have all experienced a drop, particularly Frankfurt and Berlin which have rates of 2.4%. London and Madrid however have benefitted from this situation.
Paris is stable at 2.7% but Lyon and Marseille have seen their rates compressed.
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