According to Savills, offices in central business districts, residential, smart mixed-use, logistics, space as a service and the lack of prime assets are six of the main trends we will see in the European commercial real estate investment market in 2019.
The international real estate advisor predicts that prime offices will continue to be the “top pick” for core investors, in particular in Germany, the Southern European cities as well as the Central and Eastern European markets. Value-add investors could focus on transport and storage, mainly in Poland, Czech Republic and Romania, while redevelopments and new developments are the main routes to higher returns, according to the international real estate advisor.
Michał Stępień, Associate, Investment Department, Savills, says: “Following a record year on the investment market in Poland, with the total investment volume of EUR 7.2 billion, we expect investment sentiment to remain positive in 2019. Like in other European markets, prime yields in Poland are now record low, nevertheless, dynamic growths of both office and industrial markets and fierce competition among major developers had been until now, inhibiting the pace of rental growth, which has kept capital values at attractive levels. Strong occupier demand and growing construction costs have been gradually pushing developers to increase rents, providing potential buyers with growth opportunities. Thus, we expect, we will see a continued demand for prime office assets in Warsaw City Centre and leading regional markets, especially those with excellent public transport access, as well as strong investor demand for industrial assets. Analogously to other European markets, retail investment will be limited to prime, modern and centrally located assets, responding well to changing consumer behaviours, as well as to opportunistic and value-add projects.”
According to Savills, office vacancy is at an all-time low, prime office rents are rising and the new supply will be just enough to cover the space required from new employment creation across Europe.
Eri Mitsostergiou, Director, European Research, Savills, says: “Average prime office yields are at a record low in Europe (3.65% in Q3 2018), however this product will remain a top pick in 2019, especially for risk adverse strategies. Similarly, average vacancy rates in Europe are at an all-time low of 5.9% with Berlin (1.4%), Hamburg (4.5%), Munich (2.5%) and Stockholm (3%) having almost no available office space. As a result we expect prime office rents in Europe to continue to rise, by 3.4% on average this year, with Milan possibly seeing prime office rents increase by 9.1%, Frankfurt, Barcelona, London’s West End, Dublin and Madrid by over 6%, Hamburg, Lisbon, Munich, Dusseldorf and Amsterdam by approximately 4% and Cologne, Warsaw and Copenhagen by around 2%.”
Savills notes that the share of logistics in European investment activity has already risen to almost 14% of the total and is expected to grow even more over the next 12 months. Prime industrial yields have dropped to an average of 5.3% across Europe, which is 148 bps below the 10 year average. The international real estate advisor anticipates that occupier and investor demand will remain strong, as the share of e-commerce continues to rise in all European countries.
Eri continues: “Competition between cities to attract international and national investors will accelerate this year. Those cities where local governments and market players work together to develop new areas and redevelop existing space in order to create smart and liveable communities will stand out from the rest. At the same time, the model of the on-demand economy is causing disruption to the industry with occupiers expecting access to services, flexibility and personalisation. New types of space usage and management are emerging and investors are increasingly becoming operators in order to maximise the performance of their assets.”
Marcus Lemli, Savills Head of investment for Europe and CEO for Savills in Germany, says: “The market will remain competitive for investors in 2019. The lack of supply of prime assets will lead more investors towards niche sectors, secondary cities and development opportunities.
“Resilient investment strategies should take into consideration not only property cycles but also long term structural changes. New types of property uses have emerged and expanded in Europe, responding to demographic and technological changes such as co-working, co-living, retirement communities, purpose-built student housing and mixed use concepts to name but a few. From an investor perspective these property types are not just alternatives to the traditional real estate portfolio but becoming the new mainstream as they prove to respond successfully to structural changes of the drivers of demand.”