Investment in Europe’s commercial real estate markets ended 2017 in a strong position. We’re still calculating the final numbers but total volumes in the markets Savills monitors are set to surpass €230 billion, exceeding 2016 by between 5 and 10 per cent.
But that’s 2017. Where’s the money likely to head in 2018?
Allocations into real estate are set to continue to increase, pushing some players into non-core markets in central and eastern Europe which are expected to outperform the European average in 2018. However, most investors are likely to still favour the familiar, and competition for quality assets in traditional core markets will be fierce.
Asian money will continue to look for a European home. More Korean and Singaporean investors will join the Chinese in looking to Europe for investable assets, although the former are likely to shift from acquiring trophy assets to long-term strategic investments in sectors including healthcare, student housing and multifamily.
Capital value growth will be hard to come by and yields in Europe’s major cities will be kept at historic lows by the weight of money competing for good quality assets.
Low prime yields will be justified by 2018’s positive rental growth prospects in areas of the market with healthy occupier fundamentals. Secondary and value-add segments will now be targeted in search for better returns, but 2018’s investors are expected to have a more measured approach to risk, which could restrict volumes and limit yield compression. Secondary market segments that are challenged by structural changes, such as secondary/ tertiary offices and some retail markets, may see prices moving out.
Alternative locations and sectors supported by structural technological and social changes will attract growing interest such as residential (housing, student housing and senior housing), hospitality, healthcare, data centres, renewables and infrastructure. Emerging mixed-use concepts, combining residential and office space with leisure, offer diversification benefits and countercyclical performance. However, the small volume of available institutional quality product may require investors to consider committing to development projects.
In 2018 investors will continue to look for prime retail opportunities, focusing on the best performing high streets and shopping centres. For those that are prepared to take some redevelopment risk, opportunities will also emerge in secondary urban centres that can be turned around into community retail hubs. Structural change will also create some opportunities in out of-town centres, such as retail parks with good catchments that can be redesigned and attract non-traditional retail warehousing retailers, leisure, cinemas and F&B as well as click and collect points. Despite the fact that fundamentals supporting retail sales are robust, with rising consumer spending, falling unemployment and rising tourist numbers, further capital gains are unlikely and rental growth prospects are limited.
Read more: European property themes 2018