Will European real estate change its face in this first quarter of 2022? The success of the vaccination campaigns and the measures to support the economy have cushioned the effects of the health crisis and even allowed the real estate market to show some resilience so far. But if European government measures (partial unemployment, support for the most exposed sectors, etc.) have favored a rapid return to pre-crisis GDP levels while limiting job destruction, accommodating monetary policies, disruptions in the global supply chain (notably in raw materials, energy and semiconductors) and labor shortages in some sectors have resulted in a resurgence of inflation.
In this context, some central banks are tempted to adjust their monetary policies, which could impact long-term rates and have consequences on property yields. Added to this is the international situation with the Russian-Ukrainian conflict, an additional source of uncertainty. Some investors are adapting their real estate investment strategies. In particular, part of the capital redirected towards logistics and residential assets. This phenomenon can be explained both by economic factors and above all by structural trends.
If we look at the logistics sector, the breaks in certain supply chains have led players to modify their management, which used to be just-in-time and therefore to review their storage capacities. At the same time, the growth of e-commerce is generating significant additional needs, both in traditional logistics and in so-called last-mile urban logistics. This explains why the 8 main markets in Europe should experience a new take-up record in 2022 after two already very robust years. Such dynamics lead to prospects for rental growth, attracting investors looking for future returns.
On the residential side, it is above all the steady growth in income combined with yields now close to commercial real estate that are attracting a number of players. Indeed, European rents are expected to grow by 2,6% per year on average until 2026, which is faster than inflation. These forecasts mainly target new assets, not affected by rent controls. However, it should be noted that rental growth in southern European cities should be weaker due to less dynamic demographics.
With regard to office real estate, the generalization and intensification of the use of teleworking has reduced the visibility of companies with regard to their future needs and has been a factor of wait-and-see attitude for 24 months. However, the easing of the constraints linked to the pandemic has confirmed the wish of employees to return to face-to-face activity at the rate of 3 days a week on average. Combined with a foreseeable de-densification of spaces, the need for office space should only be reduced by around 5% to 10% over the next 6 years, while at the same time, the office stock should experience moderate growth. around 1% per year over 5 years. The combination of these factors should limit the impact on future vacancies and not induce a general drop in rents.
In addition, a certain rebalancing concerning trade could emerge. The successive confinements, which have hit retailers hard, pushing them to rationalize their locations, have led to a significant drop in prime rents both for the foot of buildings (-16%) and for shopping centers (-20%) . This structural adaptation of the sector makes the rates of effort more sustainable and therefore makes it possible to envisage in the long term a stabilization or even an increase in certain rental values, once the health constraints have been lifted and the financial health of the tenants restored.
If we also take into account the readjustment of the rates of return on retail assets that have taken place in recent years, we understand that prime shopping centers show the best prospects for overall return (7,4% per year) over the next five years thanks to the expected compression of prime rates.
Obviously, we cannot conclude without mentioning the element that will profoundly transform our industry, all asset classes combined, namely the need to adapt our real estate portfolio to environmental requirements. Integrating climate risks into our investment and management strategies in order to sustainably preserve the value of assets will require significant investments that will have to be included in the performance expected and/or demanded by investors. This adjustment of returns to climatic risks, while it seems unavoidable, does not seem to reduce the attractiveness of real estate markets. As evidenced by the volumes invested in 2021, investors' appetite for real estate, which offers resilience and protection against inflation, does not yet seem about to dry up.
Tribune by Rob Wilkinson, CEO Europe of AEW.