by Thomas Beyerle, Managing Director IVG Immobilien AG, Head of Corporate Sustainability & Research
At the end of 2014, the conclusion will be: “All in all, it was another good year.” This is our expectation, too – the capital market-induced boom on the European commercial property markets will continue. New records will be achieved and low points will be left behind. So far, so good.
However, our analysis traditionally goes beyond a mere description of a good environment and a rosy outlook – particularly since the positive short-term picture hides the reality of a structural change that will continue to significantly change the conditions of the market. Divergence is the keyword.
This IVG Market Tracker “European Commercial Property Markets 2014” illustrates this divergence using six propositions:
• Proposition 1: Sustained divergence on the office letting markets.
• Proposition 2: Accelerated structural change affecting over-the-counter retail.
• Proposition 3: Increased demand for logistics space throughout Europe due to rapid growth in online retail.
• Proposition 4: Growing importance of banks in property financing.
• Proposition 5: Growth in investment transactions outside the core segment.
• Proposition 6: Prime yields to remain low.
Our explanation of these propositions is as follows:
• All in all, the European office letting markets will see a low level of momentum in terms of new letting in 2014. At the same time, we are anticipating lively relocation activity on the part of companies. The German office centres, London and Stockholm will enjoy above-average performance. In our view, there remains a pronounced risk in the markets of Southern Europe and the Dutch office market. Although there are signs that the downward trend in the prime segment has bottomed out in both of these regions, we do not expect weak properties and locations to enjoy similar development, even in the longer term.
• From a rational perspective, saving is no longer a worthwhile pursuit. Following a downturn in sales in 2013, European retail is benefiting from this recovery in the propensity to spend and the consequences of the “consumption bottleneck” in previous years.
• In particular, the price-sensitive segment of specialist retail, which is already seeing surplus capacity in many locations, is being put under considerable pressure by online retail. Vacancy rates in agglomerations and retail parks in the specialist retail segment are on the rise, while rents are falling. In Southwest Europe and the CEE states in particular, where the range of suitable core tenants for retail parks is still limited, growth in this retail asset class is slowing to a standstill.
• The expansion of online retail will lead to a further increase in average take-up in the European logistics property segment, which we expect to reach a new record level. Owner-occupancy transactions will again account for the majority of rental take-up realised in 2014.
• In 2014, institutional investors such as insurance companies and pension funds will expand their activities on the property financing markets. Financing via corporate bonds will also become increasingly important. In the longer term, we believe that the structure will evolve to resemble that seen in North America.
• Core is leading the way, but demand among the vast majority of investors in 2014 will again be primarily concentrated on properties that offer a stable, low-risk letting situation beyond the short term.
• Investments in the “Value-Added” and “Opportunistic” risk classes will enjoy growing momentum. In some regions (particularly Southern Europe, Ireland and the Netherlands), prices (and fair values) for properties with an extremely weak letting outlook have already found their equilibrium in some cases or have fallen so far (e.g. in Spain) that they are increasingly being acquired by opportunistic investors with strong equity positions – in many cases private and local investors.
• If 2014 sees extremely strong development on the letting markets and no sign of a rise in interest rates, a downturn in prime yields can be expected. Having said that, we believe this to be largely unlikely.