Economic growth in the Eurozone consistently beat expectations throughout 2017, marking the fastest pace of growth since 2007 and supporting consensus estimates of 2.2% growth for 2018. M&G Real Estate’s latest European real estate market outlook predicts accelerated economic growth for the occupier and investment sectors, underpinned by the improving economic picture, a nine-year low for unemployment and monetary policy which continues to attract investment.
Interest rates remain low and the ECB is committed to buying bonds until at least September 2018. This should help property yields to remain attractive throughout 2018, with potential for further yield compression in many markets.
The office sector saw 4% rental growth on average across 23 cities in 2017 – a trend expected to continue over the coming few years as supply remains modest amidst the growing occupier demand for space. Most notably, technology will be a key driver of demand in 2018, with tech-dominated cities such as Berlin, Paris and Amsterdam prevailing.
The industrial market is patchier within Europe than other sectors. After relatively strong rental growth in selected markets (Stockholm, Milan and Rome) in 2017, the Outlook suggests that, although the European industrial cycle will be led by the Nordics, there should be wider scale growth as vacancy rates reach record lows, confidence returns and e-commerce is adopted more widely. Two specific drivers are behind this wider growth: the TEN-T $700 billion transport infrastructure project, which will foster more intelligent, efficient transport systems, integrating urban areas in to core logistics corridors, and the launch of the Digital Single Market (DSM), which will free up digital practices across Europe, allowing the free movement of people, services and capital.
Elsewhere, in the retail sector, an uplift of 2% rental growth is forecast over the next three years. High consumer confidence, increased tourism and high spending from emerging markets visitors should perpetuate healthy growth for 2018 and possibly 2019 in the shop, retail warehouse and shopping centre sectors.
There is no doubt that investor interest in Europe remains strong. INREV’s Investment Intentions Survey suggests that 41% of global capital will be deployed in the region in 2018, however, lack of core real estate and lower levels of global capital could see volumes taper off towards the end of the year.
Vanessa Muscarà, Associate Director, Research at M&G Real Estate, says: “We expect investment across Continental Europe to remain strong with prime assets in core locations becoming scarce. Our predictions show the industrials market will be a key driver in capital movements across the region – with an ever-increasing importance on locations as vital infrastructure projects take shape.
“With an accelerated recovery and clear growth expected across Eurozone markets, it is safe to say that we expect strong occupier demand across all sectors. This will prompt further rental growth which translates into strong returns to investors in the medium term.”