Global performance in a macroeconomic context
BNP Paribas Real Estate Experts have analysed the state of the European property and global markets, covering the macroeconomic picture, the rental market, foreign capital flows in Europe, office trends and the trade and logistics sectors.
Richard Malle, Global Head of Research at BNP Paribas Real Estate, outlined the differences in macroeconomic performance in a selection of global and European markets.
The United States: US growth reached 2.9% in 2018, underpinned by lower taxes as well as credit expansion, topped off by large increase in US government debt. The growth is set to decline in 2019 (2.1 % expected), due to the slowdown in global trade and the tightening of monetary and financial conditions. However, although current business indices confirm a slowdown in growth, they do not point to a recession for the world’s biggest economy.
The United Kingdom: Despite the proliferation of doubt in the UK, recent data show that British growth remains robust. In our central scenario, UK growth could even be better in 2019 than in 2018, where it came in at 1.3 %. Clearly, the highly uncertain events around Brexit are still what will most determine the future economic performances of the country.
The Eurozone: The Eurozone is experiencing a reduction in the pace of growth, with the slowdown of foreign trade affecting the results of the entire area. Growth in France and Germany is also weaker compared to 2017.
Interest rates stable or rising slightly
With respect to central bank policies, although key interest rates could rise by some 50 basis points in the US and the UK in 2019, linked to better levels of inflation and activity, a continuation of zero interest rates is increasingly expected in the Eurozone. Signs of a slowdown in the economy and the discontinuation of quantitative easing at the end of 2018 will discourage the ECB (European Central Bank) from adopting a much tighter monetary policy. As such, short-term rates such as the 3-month Euribor may edge up, in keeping with an increase in the ECB deposit rate, but they are still likely to remain in negative territory.
All told, major factors have combined to keep long-term interest rates at relatively low levels, such as moderate growth, controlled inflation, abundant liquidity and risk aversion that is likely more pronounced than in previous years. This is why the long-term bond yields of the main Eurozone member states, such as France and Germany, if they move, are only likely to rise very slightly by the end of 2019. Moreover, according to the consensus of most economists, it is the first time in over three years that expectations of an increase in long-term interest rates have been so low.
Commercial real estate rental markets
Best performances in the rental market in 2018 were recorded in London, Luxembourg, Milan and Warsaw, with the sharpest rise seen in Madrid where prime rent has increased by 13%.
German markets have shown more mixed results. However, the decrease is based on an exceptional 2017, and some markets are penalised by lack of supply, with vacancy rates at historic lows in Hamburg, Munich and Berlin.
After reaching all-time highs in 2017, with 13 million m2 of office space placed, the French rental market fell by 3%. This market has also suffered from a lack of quality supply.
The contraction of vacancy rates, as well as good economic conditions, have led to an increase in prime rents in most cities. Only London has seen a fall in rental values with prime rent down 18% compared to June 2016, the date of the Brexit referendum.
European property investment
There have been fairly stable volumes of investment – around €264 billion committed – during 2017-2018. This follows the all-time record in commercial real estate investment set in 2017.
However, the situation is significantly different in other markets. Following the Brexit referendum, the UK market is down 10% compared to 2017.
Since 2009, the German market has been the most active in Europe and continues to present good prospects. It recorded its best result of all time in 2018, with €61.5 billion invested. The French market is characterised by both activity and stability with a positive economic outlook for the real estate sector.
Nearly 40% of capital comes from European investors, especially Germans. And as a mark of their confidence in the European markets, investors from the United States and Canada increased their acquisitions by 15% in 2018. These are concentrated in the main markets – Germany, France, the United Kingdom and the Netherlands. Operators from the Middle East and Asia, including South Korea, Singapore and Hong Kong, are also present.
Overall, office investment volumes have remained stable, but retail investment, industrial and logistics have seen a decline.
Real estate prime yields
Prime yields have reached new lows in many European countries. The lowest rate was recorded in Berlin at 2.7%, followed by Munich, Paris, Hamburg and Frankfurt.
Most other markets have rates below 4%, and they have dropped below 5% in Warsaw and Prague.
The most dramatic decline was seen in logistics and high street retail, although there was a fall in almost all segments.
Middle East investments in European real estate
Sophian Madani, Associate Director, Middle East, BNP Paribas Real Estate, explained that investments in Europe originating from the Middle East – and in particular, the Gulf – are influenced by two fundamental factors.
These are the dependence of the region’s economies on the energy sector, especially oil, and the indexation of their currencies to the US dollar.
Lack of liquidity sits alongside an increased willingness to invest in the European real estate market, with the asset class being seen as an opportunity to diversify.
Influenced by a favourable exchange rate for the dollar, Middle Eastern capital flows increased by 22% in 2018 in this market, accentuating competition.
Germany has benefitted primarily, followed by the United Kingdom, while France has attracted more investment than in the past because of an improved perception of its tax system.
The UK remains a favourite for Middle Eastern investment.
“Influenced by a favourable exchange rate for the dollar, Middle Eastern capital flows increased by 22% in 2018 in the European real estate market, accentuating competition.”
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