Investor demand for real estate is high across most locations and sectors within Europe despite a weakened economy and rattled markets reacting to recession fears.
After a “skittish” last four quarters, solid demand for prime office space in most major European markets returned after four years of steady growth, according to a report by the real estate arm of UBS Asset Management.
The retail sector, however, was blighted by low demand and structural over-supply.
Amidst challenging market conditions, supply continued to be largely restrained, the study found.
“Investment volumes were muted in the second quarter as a significant amount of political and economic uncertainty appears to have weighed on sentiment,” said Gunnar Herm, head of research and strategy for Europe.
“A further issue is the relatively late-cycle nature of the European market, with prime yields at record lows in the majority of key investment markets.”
Half-yearly volumes were down by 15%, whilst volumes for the second quarter this year were 10% lower than the same period in 2018.
Despite this, pricing remains at historically high levels. Whether this can be sustained depends primarily on the future direction of government bond yields, the report’s research team said.
“Europe is heading the way of Japan in having permanently low market interest rates, while others are less convinced and argue that eventually the forces that have held bond yields low will have to reverse,” said Herm.
“Bonds are liquid and can reprice overnight, whereas real estate cannot. Should the current low yield environment reverse, many real estate investors could be faced with significant capital loss.”
Across most markets, particularly in the UK, property vacancy rates continued to rise.
“In addition, there is heightened caution among retailers still trading, with anecdotal evidence of successful retailers seeking rent reductions from landlords,” said European real estate analyst at the firm, Sean Rymell.
“This is due to a combination of weak market conditions as well as the impact of e-commerce, which has radically reduced the number of stores required to achieve national coverage,” Rymell said.
Prime retail parks saw an increase in vacancy and secondary parks remained stable, whilst the industrial sector saw strong leasing volumes across most of Europe, primarily driven by e-commerce.
“The short-lived “euroboom” seems a long time ago now as the Eurozone has seen challenging market conditions,” Herm said.
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