Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
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Outlook
2018
Navigating the Placemaking Large, stable and liquid: The state of the Opportunities Generating
Australian real to enhance the investment case for global listed real in Nordic alpha
estate market returns the Japan office market estate market retail returns
OUTLOOK 2018
It was the best
GLOBAL CONTACTS
OF TIMES…
Kiran Patel
Global Chief Investment Officer
kiran.patel@savillsim.com
Irfan Younus
Head of Research, Europe
irfan.younus@savillsim.com
Nicole Bångstad It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of
Regional focus: Nordics
nicole.bangstad@savillsim.com foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of
Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…1
Judith Fischer
Regional focus: Belgium, Luxembourg
judith.fischer@savillsim.com
Benedict Lai The 28-state European Union is enjoying its strongest Against this backdrop, it is increasingly important to
Regional focus: Asia-Pacific
benedict.lai@savillsim.com growth in a decade, yet the European Central Bank work with a real estate investment manager with the
remains concerned that tapering of its quantitative local knowledge and expertise to help investors navigate
easing programme could derail the region’s economic these best and worst of times. The Savills Investment
Victoria Ormond
Regional focus: Spain, United Kingdom recovery. Average property yield spreads over 10-year Management Outlook 2018 report features a collection of
victoria.ormond@savillsim.com government bond yields are close to record highs, yet commentary from internal fund managers and research
investors are concerned about rising interest rates. The analysts, highlighting the strategies they employ to
Andreas Trumpp all-in cost to borrow money is close to record lows for capitalise on current investment market opportunities.
Regional focus: Germany, Poland core assets, yet markets are sceptical of increasing
andreas.trumpp@savillsim.com
leverage. We are living in the most peaceful times since
World War II, yet political risk is elevated. If the state of KIRAN PATEL
Norbert Schley Global Chief Investment Officer,
the world could be summarised in a few words, it is fair
Regional focus: France, The Netherlands Savills Investment Management LLP
norbert.schley@savillsim.com to say that these are uncertain times.
Hilary Waterman
Regional focus: Ireland
hilary.waterman@savillsim.com
1 Dickens, Charles. A Tale of Two Cities. London: Chapman, 1859.
OUTLOOK 2018
4 savillsim.com
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Contents
22.
European real estate
06. market update
ECONOMY TO TRUMP POLITICS
Key
recommendations
08.
Risks
by IRFAN YOUNUS,
Head of Research, Europe
NAVIGATING THE AUSTRALIAN REAL ESTATE MARKET
by Lee Tredwell,
Head of Investment, Australia
42.
• Page 10-11
PLACEMAKING TO ENHANCE RETURNS
by Harry de Ferry Foster,
Fund Director, Charities Property Fund Asia-Pacific real estate
market update
• Page 12-13
LARGE, STABLE AND LIQUID:
THE INVESTMENT CASE FOR THE JAPAN OFFICE MARKET 24. GROWING OPTIMISM AMIDST UNCERTAINTY
European total return
by Will Johnson,
Associate Director of Investment, Japan
• Page 14-15
property market cycle
44.
THE STATE OF THE GLOBAL LISTED REAL ESTATE MARKET
by Thomas Körfgen,
Global Head of Indirect Real Estate
Asia-Pacific total return
• Page 16-17 AUSTRIA GERMANY NORWAY
• Page 26 • Page 31 • Page 36
property market cycle
OPPORTUNITIES IN NORDIC RETAIL
BELGIUM IRELAND POLAND
by Peter Broström, • Page 27 • Page 32 • Page 37
Nordic III Fund Manager
• Page 18-19
DENMARK ITALY SPAIN
• Page 28 • Page 33 • Page 38
AUSTRALIA JAPAN
GENERATING ALPHA RETURNS • Page 46 • Page 48
by Jamie Pearson, FINLAND LUXEMBOURG SWEDEN
Fund Manager, UK Income and Growth Fund • Page 29 • Page 34 • Page 39
• Page 20-21
CHINA SINGAPORE
• Page 47 • Page 49
FRANCE THE NETHERLANDS UNITED KINGDOM
• Page 30 • Page 35 • Page 40
OUTLOOK 2018
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Key recommendations
EUROPE ASIA-PACIFIC
Austria Italy Poland Australia
Focus on Grade A offices with long- Grade A office buildings located in Focus on Grade A offices with Invest selectively in CBD offices in Sydney
term rental agreements in prime Milan CBD, which is benefitting from long-term rental agreements in and Melbourne given the generally
Vienna locations close to or integrated improving employment. We also see prime Warsaw locations close to or limited risk premium between prime and
with metro line stations in the central selected opportunities in the fringe integrated with metro line stations in secondary assets. Target assets with
business district (CBD) and city centre of the Milan high street, particularly the CBD and city centre submarkets. lower passing rents that will benefit from
submarkets. those high streets benefitting from strong demand-supply fundamentals and
rising tourism. Our top pick is Italian Look for investment opportunities improved infrastructure, including fringe/
logistics space around major transport in centrally located submarkets suburban locations.
Benelux corridors, which is attractively priced in Kraków, Wrocław, TriCity (a
Target high quality office space in compared to other segments. metropolitan area consisting Target defensive, income-producing
Brussels CBD and Luxembourg city of Gdańsk, Gdynia and Sopot), retail and logistics assets in Sydney and
central as well as central locations in Katowice and Łódz. Melbourne, such as convenience-based
the Netherlands, which are attractively The Nordics property with fixed rental growth at
priced compared to core European Seek retail opportunities in prime Consider build-to-suit fulfilment and above-inflation levels.
distribution centres on 10+ year BE CAUTIOUS OF…
markets and offer further potential for locations in Tier 2 cities, preferably in
rental growth. Aarhus, Denmark’s second largest city. leases with good quality covenants
Mispricing risk in strongly competitive markets, where choice of
and significant tenant capital China asset is increasingly key, and local expertise recommended;
Look for high street opportunities in Target food-anchored, medium-sized expenditure investment that can be
Target offices in new Shanghai CBDs that
selected top 20 Dutch provincial cities neighbourhood schemes and regional used by third parties in the top five All-time-high rents on the Copenhagen high street and signs of
are supported by infrastructure.
such as Eindhoven and Maastricht, centres in Sweden. locations: Warsaw, Katowice, Poznan, weaker letting activity, which could indicate that Copenhagen high
which are more attractively priced. Wrocław and Central Poland (Łódz). Consider Tier 1 city opportunistic street retail is approaching a market cycle peak;
Target urban, last-mile logistics strategies (e.g., funding gaps, distress Paris CBD, one of the most expensive office markets in Europe,
facilities in Oslo and Copenhagen situations) for logistics assets or retail
Spain except for refurbishment opportunities. Furthermore, developing
France and modern premises in the major podiums in view of current asset pricing. areas such as the northern fringe of Paris have yet to achieve a
Consider modern distribution centres cities of Sweden, with a focus not Focus on well-located retail critical size and to establish themselves;
in established logistics locations with only on last-mile solutions but also on warehouses that can take advantage
excellent transport links along the mega-distribution centres suitable for of e-commerce trends, and Spanish The impact of Dublin’s housing shortage on the city’s office sector;
Japan
north-south logistics corridor. large online retailers and third-party logistics hubs along the so-called German high street retail in secondary and tertiary cities due to
logistics providers. Golden Banana logistics corridor Target risk-adjusted office and residential
opportunities in sub-core districts of weaker letting activities, the structural shift towards e-commerce
Target urban logistics in or on the stretching from Spain to Northern Italy. and prime rents having already peaked in most cases;
Target prime office locations in Greater Tokyo and selected established
fringes of Paris as well as other major
Helsinki CBD, as yields are slightly regional submarkets. Increasingly challenging pricing for core properties and core
urban areas.
higher than those of Scandinavian UK locations across Germany;
counterparts, and Finland’s Seek well-located retail warehouses
Singapore Prime retail in Singapore, as leasing demand will be tempered
Germany economy is showing strong recovery. close to transport links, which by stagnant consumption growth, structural challenges from
Focus on core office, retail and are positioned to take advantage Target high quality CBD offices that have e-commerce and supply risks through 2019;
Look for opportunities in the Oslo of trends in e-commerce. leases marked to current rental levels that
logistics properties in and close to
office market, whose economic are in the trough of the cycle. Prime offices in traditional Shanghai CBDs where prices are at
Germany’s biggest conurbations,
fundamentals are positive for rental Target logistics properties near cities historical highs and capitalisation rates are likely to remain under
such as Berlin, Frankfurt, Hamburg,
growth. such as Greater London, the Big Target modern logistics facilities with pressure for the foreseeable future; and
Munich and the Ruhr area.
6 (Birmingham, Bristol, Edinburgh, strong tenants and long leases that have Tokyo’s prime high street retail market where rents appear to have
In Stockholm, we see potential office Glasgow, Leeds and Manchester) recently started.
Look for investment opportunities in limited upside despite the strong fundamentals supporting the
space investment opportunities in as well as Oxford and Cambridge.
selected growing secondary cities sector. Rising affordability concerns and a scheduled consumption
the fringe-of-CBD or best suburban
such as Augsburg, Freiburg, Münster tax hike in 2019 are likely to have an impact on retail sales.
locations that offer better availability
and Nuremberg.
and affordability.
OUTLOOK 2018
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Central banks stuck in ‘Hotel California’? As figure 2 illustrates, the Congressional Budget Office (CBO)
projects that at some point in the next five years, the US will cross the
Central bank behaviour will continue to be one of the main themes
85% ratio of debt to gross domestic product. Empirical studies suggest
of 2018, as the drawback from extremely loose monetary policies is
that at this level, a meaningful slowdown in economic activity is likely.
cause for concern. The world has taken on increased debt levels and
Consequently, we suggest investors be mindful of this possibility and
unprecedented stimulus in order to recover from the global financial
its impact on European real estate markets.
crisis and thwart deflationary pressures (figure 1) – now the question is
RISKS
if markets can handle the stimulus being withdrawn. FIGURE 2:
Estimated debt as a percentage of GDP
FIGURE 1:
Selected countries’ net central bank asset purchases
(USD billion, 2009-18f) CBO's June 2017 baseline
Debt held by public with tax cuts
250
100%
150
95%
50
90%
-50
2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f 85%
EA JP UK US SE 5 Economy Aggregate
80%
Source: Citi Research
China’s deleveraging is too big to ignore Note: ‘f’ denotes forecast; 3 million rolling sum of change in domestic 75%
by IRFAN YOUNUS, currency securities holdings expressed in USD at market exchange
Head of Research, Europe One of the key reforms proposed by President Xi Jinping is to reduce financial leverage.
rates; EA = euro area and SE = Sweden.
Savills Investment Management LLP Policies to tighten liquidity slowed credit growth in 2016, causing a financing contraction 70%
through 2017 that has driven a steady rise in government bond yields and credit spreads. 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
However, looking at the bigger picture, the deleveraging and reform that is driving China’s The Federal Reserve is the first leading economy to have begun
near-term slowdown are positive for its long-term growth outlook. China is committing scaling back QE and raising interest rates. While the US economy has Source: CBO (as of 30 November 2017)
W
hile 2018 will present to reforms that will impose international standards on its capital markets, open its bond held firm amidst this slow policy shift, it clearly has not accelerated,
various opportunities for market to foreign investors and create vital sources of capital for Chinese companies. either. As such, questions remain about possible repercussions if key
real estate investment, central banks — not just the Fed — start to reduce stimulus faster than Brexit
originally intended.
multiple widespread The UK and European Commission have completed the first
Mispricing risk
economic as well as The biggest risk of this appears to be in Europe, where many
stage of Brexit negotiations, which focuses on three areas: the rights
country-specific trends may present A combination of forces has fundamentally altered income demand and supply: of EU and UK nationals in their respective territories, the financial
countries have negative real interest rates. If negative real interest
market risks. For one, we believe ageing populations, technological advancements, mandatory requirements for financial settlement the UK will pay to the EU and arrangements for the Irish
rates have played a role in pushing up asset prices to this point, what
institutions to hold bonds, the ‘hangover’ from QE and a decade of rock-bottom base border. A transition period of 21 months will follow the UK’s exit from
that the retreat from monetary will happen when the stimulus is taken away? Do central banks remain
rates. Against this backdrop, investors in pursuit of income in 2018 and beyond will face the EU.
policy stimulus will pick up pace stuck in a ‘Hotel California’ stimulus situation?
substantial challenges and, in some cases, a difficult choice between re-adjusting income
where there is a ‘hangover’ from requirements in the face of low yields or accepting a higher degree of risk. While it is still too early to tell what the trading relationship
quantitative easing (QE), presenting between the UK and the EU will look like after the transition period,
US fiscal changes
challenges for investors’ pursuit Lower yields may tempt some investors to move further up the risk curve and outside of there are three broad options: 1) extend the transition period, 2) exit
of income. While rising interest their defined fund style. Historically, this has resulted in underperformance, as downsides Looking at regions more specifically, the United States will soon without an extension of transition period but with an agreed trade
rates pose a challenge to property are most acute for those markets and assets that do not have the support of fundamental begin to see the effects of a significant corporate tax cut. Most domestic deal or 3) exit the transition period with no deal. There is potential for
demand drivers. While we do advise making selective calls on emerging micro-locations sectors – such as retail, telecommunications and utilities, which have option 1 to become a no-exit outcome, particularly if there is a near-
pricing, central banks will likely tread
and occupier trends, such recommendations are not entirely based on attractive entry seen relatively high marginal tax rates – will benefit disproportionately term change of government.
cautiously to avoid negative effects from the tax change.
yields but rather on the underlying growth story, which weaker locations and segments
on growth rates and consumption.
often lack. There are currently close to even odds of a Labour or Conservative
It is unsurprising, then, that we have recently seen a rotation in majority in the next general election. In our view, such political
In the geopolitical realm, we advise US equity market performance away from high tech, fast-growing conditions will have potentially more significant impact on the
keeping a close eye on both Brexit Housing market slowdowns companies and those with significant exports (which already enjoy economy in the short to medium term than Brexit. The PMA forecasts
negotiations and the effects of relatively low tax rates) towards more domestic sectors. Beyond on which we base our prime real estate numbers assume a ‘stable’
Following 20 years of rising house prices in Sweden, price growth is showing signs of
the US administration’s corporate the near-term stimulus effect of tax cuts, one ought to also consider Brexit with a transition period, continuation of trade deals and largely
moderation. The neighbouring Norwegian housing market is also experiencing a similar
tax reform. Additionally, China’s their longer-term impact on debt levels and the sustainability of electronic Irish border; however, they assume no single market after
trend, as well as the London residential market. This cooling shows in sentiment surveys
accumulated debt. transition.
credit cycle is starting to turn, with as well as hard data. A sustained downturn may impact on GDP growth rates, which in
significant implications across turn could impact on consumer spending and the construction sector. This would have
Asian markets and beyond. negative repercussions for commercial real estate. However, sharp declines are unlikely
given low interest rates, limited new housing supply and income and population growth.
OUTLOOK 2018
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NAVIGATING the
AUSTRALIAN
REAL ESTATE MARKET
Office Retail Industrial
JLL ranks Sydney and Melbourne as the The retail trading environment remains In contrast to retail, the logistics sector
number 1 and 2 global cities, respectively, as challenging, with increasing competition – remains in favour, with the dynamics that are
they have over the past 12 months recorded from overseas retailers and e-commerce, hurting the retail sector having the opposite
respective net effective growth of 30.1 % and including the recent launch of Amazon in effect on the logistics market. Reduced local
17.3%. This growth should continue in the Australia – reducing growth expectations manufacturing and increased reliance on
short term, with current vacancy rates of 5.9% in what has traditionally been somewhat of imports are also leading to increased demand
and 6.5%, respectively, and new supply not a sheltered local market. Previously strong for quality logistics facilities. Competing land
forecast to be delivered until 2021 and 2020, department store or discount department store uses, largely from residential on the back of
respectively. anchors, together with discretionary retailers, increasing population growth, is reducing
are likely to continue to rationalise their store supply of industrial land and pushing rents and
Sydney has benefitted from large stock footprints, closing unprofitable stores and land values upwards in Sydney.
withdrawals. This has forced tenants to revamping others, allowing for smaller trade
relocate, increasing competition for space area with a focus on online sales. Melbourne, which is the largest logistics
and pushing effective rents up, particularly for market in Australia, still has a large potential
secondary space. Australia’s stringent planning system will pipeline of serviced land; however, available
still see this sector remain a good defensive supply is reducing – and it, too, is coming
Melbourne, on the other hand, has led on the investment; however, many shopping centre under pressure from competing residential
demand side, recording nearly 70% of national owners are having to undertake significant uses in some markets. Low interest rates and
CBD net absorption over the past five years. capital investments to maintain occupancy subsequently low capitalisation rates are
Its once seemingly infinite supply of sites has and competitiveness, which will reduce returns still making new developments feasible for
now gone with completion pending for the last in the short term. Given the low inflation developers, and this will likely serve to keep
developments in Docklands. environment, we expect rental growth to be effective rental growth limited in the short term.
subdued and incentives to remain high. The
Yields, as with other gateway cities, are at exception is CBD retail that continues to be For the first time, there has been significant
record lows; however, the spread over interest strongly sought after, particularly by global offshore investment in the Australian logistics
rates remains higher than that for other major retailers seeking flagship stores in Sydney and market, and this has pushed yields to lows not
cities within the Asia-Pacific region. With Melbourne. We expect yields to remain low seen since before the GFC. Long leases with
forecast rental growth in the short term, the until there is significant upwards movement in fixed annual percentage increases (at well
potential total returns are still very attractive interest rates. above projected near-term inflation) are still
2017 saw Australia reach the longest-ever Sydney (with a population of about 5 million) for investors. providing attractive total returns.
period of economic expansion globally: 26 years and Melbourne (with a population of about
and counting of uninterrupted growth without a 4.7 million) account for approximately 40% of
technical recession. Interest rates have remained Australia’s population and two-thirds of its GDP.
unchanged for 16 consecutive months – at an all- These are the global cities most favoured by
time low of 1.5% – and inflation and wage growth local and global investors.
remain low. As a result, we expect interest rates
to remain unchanged during 2018, in contrast Sydney is undergoing a city-wide infrastructure
with other developed economies that are in a boom, with new major roads improving access RECOMMENDATIONS
by LEE TREDWELL, tightening cycle. around the city, a new central business district
Head of Investment, Australia (CBD) light rail, a new inner-city metro system
Invest selectively in CBD offices given the generally Long-leased logistics will continue to provide strong
Savills Investment Management LLP Australia’s economy is still transitioning from and even a new airport. 1 limited risk premium between prime and secondary 3 returns (higher yields with strong fixed increases well
the resource-led investment boom earlier this assets. Target Sydney and Melbourne assets with lower above inflation). Buy assets benefitting from planned
decade – which saw Australia come through Meanwhile, Melbourne’s population continues to passing rents that will benefit from strong demand- infrastructure investment.
the global financial crisis (GFC) relatively grow at a faster rate and, given greater availability supply fundamentals and improved infrastructure,
unscathed – towards a more diversified, service- of affordable land, is likely to surpass Sydney as including fringe/suburban locations. Focus on non-discretionary retail with strong anchors
based economy. This transition is benefitting the largest city in Australia by 2030. 4 in metro areas with population growth.
the country’s two largest cities, Sydney and Target defensive, income-producing assets such as
Melbourne, which are both undergoing strong 2 convenience-based retail and long-leased logistics
population growth and infrastructure investment, property with fixed rental growth at above-inflation
levels.
coupled with property markets experiencing
favourable supply-demand fundamentals.
OUTLOOK 2018
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PLACEMAKING to 1 Aerial view Bath
ENHANCE RETURNS
2 Bath, 5-10 Westgate Buildings
3 Bath, 1-4 Westgate Buildings
4 Bath, Westpoint
5 Greenwich
2
by HARRY DE FERRY FOSTER,
Fund Director, Charities Property Fund,
Savills Investment Management LLP
hat if you could create somewhere that becomes
W
1
so attractive that workers, shoppers, residents and
visitors with spending power flocked to it? This
is the power of ‘placemaking,’ a strategy that is
central to the Charities Property Fund (CPF) and
has contributed to a decade of fund outperformance during which
time the fund grew by more than GBP 1 billion. 3 4
Placemaking can be achieved either internally – through the
acquisition of a series of buildings within an area and coordination
5
of those buildings’ repositioning – or externally, through early
movement into an area or sector benefitting from both yield shift
and gentrification effects as other investors follow. We have also taken advantage of the larger placemaking of Greenwich Peninsula in
London, which is rapidly transitioning from a former wasteland to a destination in its
CPF has enjoyed success with both strategies. We have built up own right. At the end of 2017, CPF completed the Brocklebank Retail Park development
significant holdings in core cities with excellent growth prospects, immediately adjacent to the peninsula. Eventually, the area will have more than 15,000
including in Brighton and Bath, where the fund has acquired eight residential units and a new GBP 1 billion tower sitting close to the premier O2 Arena concert
separate buildings in close proximity to each other. These asset venue and fast transport links to Central London.
agglomerations create economies of scale and enable the fund to
create prosperous new environments. For example, in Bath we have Ikea is also investing GBP 100 million in its first new London store in 10 years, 200 yards
recently completed a conversion of a number of retail units and down the road from the new park. All of these elements will serve to gentrify and place make
second-hand offices into retail, restaurants, a new hotel, serviced the area. Greenwich currently boasts a retail catchment population the size of Leeds, yet
apartments, student accommodation and a gym, effectively creating currently has no dedicated shopping centre. In comparison, Leeds has five.
a sense of place and improving the amenity as well as mix of uses
and tenants. The retail park development contributes to the placemaking of the Greenwich Peninsula
as a next-generation food and fashion retail park, tenanted by Primark, Next and Aldi – some
We have also been able to take advantage of significant falls of the standout retailers of the moment. By being involved in the construction process, we
in the availability of office space due to permitted development were also able to improve its placemaking potential and capture the benefits of future
to residential in these cities. In Brighton alone, around 800,000 technological innovation with the addition of electric car charging points and almost 1,000
solar panels.
Images: Savills IM
square feet of office space has been lost to residential development,
and developers are not replacing it, preferring instead to put more
resources into residential apartments. The office vacancy rate in This park is a prime example of the fund’s strategy of placemaking and insulating the
the city is now less than 1%. We have seen the same thing happening portfolio against technological change by building up significant holdings in core cities with
in Bath and Bristol and have exploited this with office acquisitions 1 excellent growth prospects.
in Clifton, Bath and two buildings in Brighton.
OUTLOOK 2018
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LARGE,
JAPAN HAS THE LARGEST
STABLE and
LIQUID
CONCENTRATION OF
INSTITUTIONAL-GRADE
REAL ESTATE IN THE
ASIA-PACIFIC AND
RANKS SECOND IN THE
WORLD IN TERMS OF The investment case for the Japan office market
MARKET SIZE AFTER THE
UNITED STATES. FIGURE 1:
Developed Asia-Pacific: institutional-grade real estate concentration by country
Japan Australia Taiwan
38% 12% 2%
China Singapore New Zealand
21% 7% 1%
Hong Kong South Korea
by WILL JOHNSON, 16% 3%
Associate Director of Investment, Japan
Source: MSCI and Savills Investment Management (June 2017)
Savills Investment Management LLP
Note: MSCI real estate coverage adopted as measure for institutional ownership ratio.
With office vacancy rates low Next, with its recovery having lagged most global financial crisis cutbacks and corporate
across the board, occupier flight other global markets, Japan’s once famously restructuring. A continued flight to quality
expensive real estate now looks relatively and the gradual removal of large swathes of
to quality combined with the inexpensive – both from a historical obsolete pre-seismic stock will also funnel
removal of outmoded stock is perspective and pound for pound. Despite a Japan’s plethora of small- and medium-sized
expected to support average steady recovery since 2012, average pricing enterprises s to investment-grade buildings.
rents and the absorption of for commercial assets in Tokyo sits 11%
With 2017 set to mark a sixth consecutive
near-term supply. down from its 2007 peak, while prime office
year of expansion in domestic GDP,
space remains around 25% cheaper than
Japanese corporates are enjoying record
10 years ago. Commercial land prices are
Looking past the bells and whistles of profitability, which has led to new property
also edging up from historic lows and are in
Abenomics and quantitative easing, what requirements for headcount increases as
line with the pre-bubble era. This not only
does Japan’s property market offer overseas well as location and building upgrades.
mitigates downside risk but also suggests
investors? First, it has regionally unrivalled This positive economic context looks
that capital appreciation in Japan’s largest
breadth and depth: Japan has the largest set to remain through the medium term,
metropolitan areas can be sustained for the
concentration of institutional-grade real supported by the political stability provided
foreseeable future.
estate in the Asia-Pacific and ranks second by the recently re-elected Shinzō Abe
in the world in terms of market size after the Furthermore, effective yields for prime cabinet, as well as the Bank of Japan’s
United States. Tokyo office assets are on par if not favourable ongoing dedication to its inflationary
compared to London, New York, Paris and monetary policies.
In fact, Japan alone accounts for roughly
Hong Kong. Meanwhile, borrowing costs are
10% of global stock. Moreover, Japan’s The major challenges for global investors
among the lowest globally, making Japanese
property market is highly liquid. There are remain Japan’s relative opacity and how
property investments particularly attractive
no barriers to entry for overseas institutional to access investable stock without chasing
on a risk-adjusted, levered return basis.
investors, land is predominantly freehold down yields. Savills IM’s long and successful
and the pool of local end-buyers for assets of We also expect the occupier market to track record in this market is testament to
all shapes and sizes is deep and diverse. Such remain landlord favourable through the the fact that having an established specialist
buyers include private investors, domestic medium term, particularly for quality team on the ground with experience
corporations and developers, as well as mid-tier offices. The Tokyo market is well executing through multiple cycles is key to
Japan’s rapidly growing public and private positioned to absorb planned medium-term accessing off-market deals as well as the
REIT sector. supply, with cyclically low vacancy indicative valuable arbitrage opportunities that can
of latent demand following years of post- provide outsized returns.
OUTLOOK 2018
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The state of the Smart debt refinancing FIGURE 1:
Capital raised in Europe (EUR million)
GLOBAL LISTED REAL
Low interest rates and strong demand for fixed
income have resulted in an increase in debt issuance. For Equity & rights Issue IPO Debt issue
example, in the year to November 2017, debt issuance 25
in Europe reached more than EUR 18 billion, with
ESTATE MARKET
a weighted average yield of 1.7%, down significantly
20
from 6% in 2008. Given its ability to borrow against 15 Equity & rights Issue IPO Debt issue
its balance sheet, the listed real estate sector continues 25
10
to benefit from this trend and is able to enhance EPS 20
growth by improving debt financing terms (figure 1). 5
15
0
In our view, not only is the reduction in average 10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Equity & rights Issue IPO Debt issue
interest rates key, but so is the tendency to increase the
25 Bond maturities
duration of debt in order to obtain more predictable cash
5
12 12%
flows into the future (figure 2). This provides insulation FIGURE 2:
20
0
10 2001
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10%
2017
against potential future interest rate rises. Bond
15
8
maturity
Equity & rights schedule
Issue IPO Debt issue 8%
6 25Bond maturities 6%
While there were some IPOs in 2017, we expect to
10
4
12 4%
12%
20
see more primary issues as well as secondary equity and 5
2
10 2%
10%
by THOMAS KÖRFGEN, rights issues in 2018. 0
8
15 0%
8%
0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031+
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Global Head of Indirect Real Estate, 6 10 6%
Savills Investment Management LLP 4 France Germany Netherlands United Kingdom Europe
4%
Further decrease in loan-to-value 2
60%
5Bond maturities
2%
12 12%
0 0%
With the direct real estate market remaining strong, 0
10 2017
2001 2018
2002 2019
2003 2020 2021 2006
2004 2005 2022 2007
2023 2008
20242009
20252010
2026
20112027
20122028
2013 2029
2014 2030
2015 2031+
201610%
2017
50%
overall loan-to-value (LTV) ratios are declining (figure 8 8%
3). This has been buffeted by recent disposals by listed
T
France
6 Bond maturitiesGermany Netherlands United Kingdom Europe 6%
he outlook for the listed real estate market is 40%
real estate companies. The average LTV ratio is now 60%
4 4% 12%
Key themes
12
positive. We expect the listed real estate market to
much lower than the historic average of 35%. With 2 10
30% 2% 10%
provide a total return of between mid to high single FIGURE 3:
50% Jan-12
0 8 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-17
0%
such a low ratio, REITs are much more insulated from 8%
in 2018
digits in 2018. Historical loan-to-value ratios: European market
6
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031+
6%
external impacts. In our view, current LTV levels will 40%
4 4%
likely remain stable, which reduces financial risk for France Germany Netherlands United Kingdom Europe
With a growing average dividend yield close to 4% for the entire 2 2%
listed companies. 30% FTSE EPRA/NAREIT Americas Index
60% FTSE EPRA/NAREIT Global Index
market, we believe that with the right stock selection, investors FTSE EPRA/NAREIT
0Jan-12 Middle East andJan-14
Jan-13 Africa Index FTSE EPRA/NAREIT
Jan-15 Jan-16 EMEA Index
Jan-17 0%
Oct-17
FTSE2017 2018 2019
EPRA/NAREIT 2020
Europe 2021 2022 2023
Index 2024 FTSE
2025EPRA/NAREIT
2026 2027 Global
2028 ex2029 2030 2031+
US Index
can achieve 5%+ income return. Moreover, we expect mergers and M&A and IPO EPS Gearing to Dividends 50% FTSE EPRA/NAREIT Asia Pacific Index
acquisitions activity to increase over the coming period. Clampdown activity to enhancement decline to grow 10.0% France Germany Netherlands United Kingdom Europe
Dividend yields 40%
on tax avoidance strategies and search for liquid listed investments increase through 60%
FTSE EPRA/NAREIT Americas Index FTSE EPRA/NAREIT Global Index
will result in increasing numbers of new market entrants. refinancing The average dividend yield for listed real estate is 8.0% FTSE EPRA/NAREIT Middle East and Africa Index
30% FTSE EPRA/NAREIT Europe Index
FTSE EPRA/NAREIT EMEA Index
FTSE EPRA/NAREIT Global ex US Index
approximately 3.7% (figure 4). In our view, with interest 50%Jan-12 Jan-13
FTSE EPRA/NAREIT Jan-14
Asia Pacific Index Jan-15 Jan-16 Jan-17 Oct-17
Direct European real estate markets performed strongly in rates remaining lower for longer and demand for 10.0%
6.0%
40%
2017, on average experiencing both good fundamentals and further income to remain strong, the right stock selection will
yield compression. In our view, momentum is strong enough going enable investors to achieve 5% average income from a 8.0%
30%
4.0% FTSE EPRA/NAREIT Americas Index FTSE EPRA/NAREIT Global Index
Jan-12 Jan-13
FTSE EPRA/NAREIT Middle East and Africa Index Jan-14 Jan-15 Jan-16
FTSE EPRA/NAREIT EMEA Index Jan-17 Oct-17
into 2018 to result in higher-than-consensus net asset value (NAV) diversified listed property market portfolio. FIGURE 4:
FTSE EPRA/NAREIT Europe Index FTSE EPRA/NAREIT Global ex US Index
growth. Dividend
6.0% yields Asia Pacific Index
FTSE EPRA/NAREIT
M&A and IPO activity to increase 2.0%
10.0% Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17
While the overall backdrop for commercial real estate remains We think the current NAV-to-share-price discounts on some Interest rates 4.0%
FTSE EPRA/NAREIT Americas Index FTSE EPRA/NAREIT Global Index
FTSE EPRA/NAREIT Middle East and Africa Index FTSE EPRA/NAREIT EMEA Index
positive, the listed sector is able to further enhance earnings per REITs are attractive and could result in increasing M&A activity. In 8.0%
FTSE EPRA/NAREIT Europe Index FTSE EPRA/NAREIT Global ex US Index
Many investors worry that rising bond yields could FTSE EPRA/NAREIT Asia Pacific Index
share (EPS) growth by improving the terms of its debt financing. the context of intense competition for direct real estate, investors
result in a fall in real estate values and, in turn, could 2.0%
10.0%
We also anticipate that rising real estate values and disposals will intending to grow their portfolios may choose to do so through the 6.0% Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17
impact on listed property market share prices. We do
reduce gearing, resulting in lower financial risk. Therefore, we do indirect market. UK listed property companies look particularly
not expect an increase in interest rates to have a material 8.0%
not expect that rising interest rates will likely have a significant attractive for an M&A play, and we see rising potential for M&A 4.0%
impact on listed property market values: higher interest
impact on real estate investment trusts (REITs) going forward. activity in the shopping centre segment and for German residential
rates usually follow a strong economy, and a strong 6.0%
companies. 2.0%
economy benefits the real estate market, which more Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17
With interest rates expected to remain lower for longer, demand than offsets increased cost of financing. Moreover, with 4.0%
for income remains strong. REITs are attractive investments due to Moreover, strong demand for income-yielding investment
many listed companies having de-geared their balance
their high pay-out ratio, tax efficiency and liquidity. should result in new initial public offerings (IPOs). Additionally,
sheet, we expect that even the direct impact on cost of 2.0%
some value-add investors who acquired assets during the global Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17
financing should be limited.
We like REITs with a strong balance sheet as well as stable cash financial and Eurozone crises are now looking for an exit through
flow and dividend yields. Another primary consideration is the the listed market route. Source: European Public Real Estate Association
experience and track record of management teams.
OPPORTUNITIES
OUTLOOK 2018
18 savillsim.com
19
in NORDIC RETAIL How e-commerce is transforming retail FIGURE 3:
store formats European retail park prime rental growth (%)
2017f 2018f 2019f
E-commerce disruption is having an impact
End 2016-18f End 2018-21f End 2016-21f
3.0 on the way people shop and is threatening the
traditional retail store concept. Nevertheless, 4.0
2.5 some retail segments will be less sensitive than 3.5
others to rising trends in online shopping. For 3.0
example, value and convenience segments are
2.5
2.0 2017f 2018f 2019f
2.0
3.0
more resilient, including retail parks offering 1.5
End 2016-18f End 2018-21f End 2016-21f
1.5 bulky goods shopping, where shoppers generally 1.0
4.0
2.5
value convenience over shopping experience. 0.5
3.5
1.0 0.0
3.0
2.0
According to PMA, Sweden is set to experience 2.5
Sweden Netherlands Germany Spain France Italy Portugal UK
0.5 the strongest retail park rental growth among 2.0
Sources: PMA, Savills Investment Management
1.5 In store Online
1.5 European countries over the next five years Note: 'f' denotes forecast
0.0
(figure 3). Furthermore, according to a global 1.0
Books, music, movies & video games
Denmark Finland Norway Sweden 0.5
1.0 survey by PricewaterhouseCoopers (PwC), FIGURE 4:
FIGURE 1: grocery, furniture and homeware; do-it-
0.0
Consumer electronics & computers
Preferred
Swedenpurchase method
Netherlands (globalSpain
Germany survey)France Italy Portugal UK
Nordics: consumer spending forecast (% year on year) yourself/home improvement; and household
0.5 EUR average spending/year Clothing & footwear
appliances are the most resilient segments to In store Online
2017f 2018f 2019f 1,200 Toys
0.0 e-commerce (figure 4).
End 2016-18f End 2018-21f End 2016-21f
by PETER BROSTRÖM, 3.0 Denmark Finland Norway Sweden Books,&music,
Health beautymovies & video games
(cosmetics)
1,000
Nordic III Fund Manager, Such structural changes in retail mean that factors
4.0
Consumer
Sports electronics & computers
equipment/outdoor
2.5 3.5
Savills Investment Management LLP
800
like location, consumer experience and quality of
EUR average spending/year
3.0 Clothing & footwear
Household appliances
2017f 2018f 2019f retail2.5premises are increasing in importance to both
2.0
ordic-based retail is benefitting from the region’s 1,200
600 tenants
2.0 and consumers. The
End 2016-18f End trend
2018-21ftowards eating
End 2016-21f Toys
Jewelery/watches
N
3.0
strong economic and employment growth, with 1.5 out has
1.5
led
4.0
to quickly expanding food and beverage Health & beauty
DIY/home (cosmetics)
improvements
(F&B)3.5concepts, which, in turn, has resulted in
1.0
1,000
several international brands looking to expand in 2.5 400
0.5
Sports equipment/outdoor
these markets. Sound demographics coupled with 1.0 stronger
0.0
3.0 demand for space. The presence of creative
Furniture & homeware
high population growth provide strong tailwinds. The 2.0
800
200 F&B options in retail parks and onSpain
2.5 Sweden Netherlands Germany
high streets
France Italy Portugal
Grocery
UK
Household appliances
motivates customers to dwell longer.
0.5 2.0
economic recovery gap between Sweden and the rest of the Nordics 0
600 1.5In store Online Jewelery/watches 0% 10% 20% 30% 40% 50% 60% 70%
1.5
is expected to narrow as Denmark, Finland and Norway pick up pace. 0.0 UK Germany Nordics 1.0
France Netherlands Spain Belgium Italy
Rapid population growth and improved consumer sentiment should be Denmark Finland Norway Sweden While physical
Books,
0.5 stores& video
music, movies are offering
games more online DIY/home improvements
400
supportive of retail sales going forward.
1.0
solutions,
0.0 online retailers are also establishing Furniture &UKhomeware
Consumer electronics
Sweden & computers
Netherlands Germany Spain France Italy Portugal
200
physical stores across Europe. Similarly, online-
0.5
Clothing & footwear Grocery
EUR average spending/year only retailers
In store are seeking
Online to establish a store-
The Nordic consumer 1,2000.0
0 based
Toyspresence to maximise synergy effects, 0% 10% 20% 30% 40% 50% 60% 70%
FIGURE 2:
Denmark Finland Norway UK
Sweden Germany Nordics France Savills reports.
Netherlands
Books, Spain Belgium
music, movies & videoItaly
games
Health & beauty (cosmetics) Source: PwC Total Retail 2017 Global Survey
The Nordics region is well-positioned for further growth in retail sales Average online spending per year per capita (EUR, 2016)
1,000
Consumer electronics & computers
due to its positive economic and sociodemographic backdrop (figure Sports equipment/outdoor
1). The success of brick-and-mortar retail will increasingly depend on 800 EUR average spending/year Clothing & footwear
Household appliances
the experience and services offered in stores. Retailers are increasingly
recognising that successful integration of physical stores and online
1,200
600 Recommendations
Toys
Jewelery/watches
Health & beauty (cosmetics)
DIY/home improvements
offerings is crucial to stay competitive, which is resulting in a larger focus 1,000
400 Sports equipment/outdoor
on omnichannel solutions. Furniture &We
homeware
recommend targeting medium-sized The rapidly changing retail environment means
800
200
1
Household appliances
Grocery regional centres and neighbourhood schemes in 2 that the polarisation between successful and
Despite the strong growth of e-commerce sales, the majority of Nordic locations with good economic foundations
30% 40% and less successful retail formats will increase. The
600 Jewelery/watches
0 0% 10% 20% 50% 60% 70%
retail sales still take place in physical stores. According to PostNord, the UK Germany Nordics France Netherlands Spain Belgium Italy DIY/home sociodemographics.
improvements Such centres and schemes renowned Swedish brand H&M, for example,
Nordic e-commerce market ranks third in Europe in terms of average 400 offer a more enhanced shopping experience delivered weaker-than-expected sales in 2017,
Furniture & homeware
online spending per year per capita (figure 2). However, consumers and attract footfall via F&B providers, leisure believed to be partly due to a lack of successful
across the demographic spectrum prefer to shop in store for social 200 Grocery
facilities and entertainment. Retail parks with integration between online and physical store
and entertainment experiences as well as dining and trialling products. 0
easily adapted space are 0% 10% 20% 30% 40% 50% 60% 70%
particularly attractive, offerings, resulting in planned store closures.
Consumers, and particularly technology-savvy millennials, embrace UK Germany Nordics France Netherlands Spain Belgium Italy
with Sweden expected to benefit most from prime This highlights the importance of stock selection
e-commerce, but as retailers evolve to meet consumer needs, physical rental growth in this area. for investors going forward. We recommend this
shops continue to offer a multichannel experience that online platforms
approach in key high street locations in major cities.
alone cannot. Sources: PMA, Savills Investment Management
Note: 'f' denotes forecast.OUTLOOK 2018
20 savillsim.com
21
GENERATING
Structural shift FIGURE 1:
UKIG Fund sector distribution
The fund shifted from 54.4% retail warehousing
ALPHA
to 42.0% industrial between 2014 and 2017 (figure 1). Office Retail Warehouse Retail Industrial Foodstore Alternative
The industrial sector has been favoured as changing 1.7%
shopping habits have reduced the need for high street
and out-of-town retail space. At the same time, demand 12.4% 12.2%
9.6%
RETURNS
26.6%
for industrial space to service Internet retailing has 7.9%
increased, leading to rental growth. The fund has 11.4%
16.9%
targeted the industrial sector to take advantage of this 2014 2017
dynamic. 4.9%
Economic drivers 54.4% 42%
Greater London and the southeast are the UK’s
economic powerhouse and create 38% of GDP, according
FIGURE 2:
to Oxford Economics. Currently, 47% of the fund is
UKIG Fund geographic allocation
invested in Greater London and the southeast, while three
years ago, only 5% was allocated there (figure 2).
The industrial sector plays a key role in the fund’s
by JAMIE PEARSON, strategy within the southeast. Particularly in Greater
Fund Manager, UK Income and Growth Fund, London, industrial land has been lost to alternative uses at
Savills Investment Management LLP an average rate of 100 hectares per annum for the last 16
years, benefitting from both increased demand and reduced
supply leading to exceptional rental and capital growth. The
fund’s London industrial assets increased in value by over 2014 2017
18% during the 11 months to November 2017. SCOTLA ND 5.4% 2.5%
NORTHWEST 7.6% 11.7%
lpha is the risk-adjusted excess return above the Infrastructure developments
A
market or benchmark. In the capital markets, Key terms and concepts Looking at the longer-term picture, the fund seeks YORKSHIRE 16.6% 21.2%
alpha is the risk-adjusted excess return of to acquire assets in strategic locations where potential
common stocks above a benchmark such as the
Alpha: infrastructure developments could bring fundamental
EA ST M IDLA NDS 6.7% 0%
FTSE 100 Index, or the risk-adjusted excess change. Hounslow, which will benefit from Heathrow’s
return of a portfolio of real estate investment trust (REIT) stocks the excess return generated above what is necessary to compensate W EST M IDLA NDS 22.3% 11.2%
third runway, and Dalston, where Crossrail 2 should
above the European Public Real Estate Association REIT index. for risk. Sources of alpha include asset management such as
drastically improve accessibility, are both locations W A LES
repositioning, lease optimisation and cost control. Alpha can also 0.0% 1.9%
where the fund has invested in long-term plays. These
In the commercial real estate market, alpha is the excess arise when assets are purchased and disposed of.
buildings will likely deliver steady income in the short LONDON
4.7% 27.3%
return generated by the investment manager above what is
to medium term, with an aim to exploit higher-value
needed to compensate for risk. This can be achieved by both
Beta: alternative uses in the long term. SOUTHEA ST 1.7% 21.9%
hands-on control of the real estate asset as well as optimising
allocations to certain sectors and geographic regions throughout the generated portfolio return that can be attributed to overall SOUTHW EST 35.2% 2.4%
the property cycle. market returns. Exposure to beta is equivalent to exposure to
Source: Savills Investment Management
systematic risk.
The Savills IM UK Income and Growth Fund
Launched in March 2010, the Savills IM UK Income and Idiosyncratic risk:
Growth Fund’s (UKIG’s) core strategy is to generate income and the risk that comes from investing in a single asset or real estate
income growth. The fund is 70% focused on income and 30% segment. The level of idiosyncratic risk an individual asset possesses
focused on growth. In the last three years, UKIG has undergone a
for 2018
is highly dependent on its own unique characteristics.
major strategic change to position itself to capture property cycle
alpha returns.
Systematic risk:
In our view, the UK real estate market is past its cycle peak, and Over the next few years, we expect income return to be the main driver of total returns. In what will be a more challenging
the risk that comes from investing in any real estate asset within environment, the fund is defensively positioned to continue to outperform. The fund’s low exposure to retail should be
to position the fund defensively – where yield shift is not expected
the market. The level of systematic risk that an individual asset beneficial, as weaker retailers will face headwinds in the next year, while the focus on London and the southeast will
to deliver performance – income is the major element of returns.
possesses depends on how correlated it is with the overall market. deliver income due to strong demand. However, with a bedrock of over 60% of income with guaranteed fixed or inflation-
Each asset within the fund has a clear role to either deliver income
or capital growth. linked rental growth and 80% low-risk tenants, UKIG has relative certainty of performance in an uncertain economic
environment.OUTLOOK 2018
22 savillsim.com
23
DEMAND SUPPLY
EUROPEAN REAL
Property yields continue to drift
lower
Offices One and a half years after the UK
referendum on EU membership, the
ESTATE MARKET UPDATE:
Occupier activity in the European office European office vacancy continued to UK has regained its position as the
sector remained robust in the year to Q3 2017. decrease in 2017. Looking ahead, JLL expects biggest property market in Europe,
Leasing volumes remain strong across most vacancy to stabilise between 7.5% and 8.0%, reports Real Capital Analytics.
economy to trump politics
of Europe, but there is increasing evidence of reflecting development pipeline increases in We expect some total investment
corporates struggling to fulfil their office space 2018-19. volumes to continue moderating this
requirements, especially in the Grade A segment year following a similar trend last
where availability is particularly low. Robust leasing activity in 2017 offset stronger year. However, in 2017 cross-border
development completions in most cities. In the investment in Germany and the UK
Office take-up rose significantly in London Eurozone, 17 out of 24 key markets recorded a was at its highest recorded levels since
in 2017, with activity boosted by a few large decrease in vacancy in Q3 2017, according to JLL. 2008, with a growing number of active
transactions. Overall office demand was strong, This fall was particularly strong in Warsaw (Q3 Asian investors.
with London West End recording its highest vacancy rate of 12.7%), Prague (7.6%), Budapest
quarterly leasing volume on record in Q3 (7.8%) and Amsterdam (7.2%). Dublin, Milan and Perceptions of elevated geopolitical
he global economy is now growing at its fastest uncertainty, capital protection measures
T
2017. The momentum in Paris continued, and Stockholm all saw a minor rise in vacancy in Q3 on
pace since 2010, with the upturn becoming and economic risk could possibly
in Germany, the Big 5 office markets showed the back of new supply.
increasingly synchronised across countries, constrain real estate investment across
no signs of weakening: Berlin and Munich saw
according to the Organisation for Economic Europe. However, recent volatility in
steady increases, while activity in Düsseldorf and According to JLL, the completion dates of
Co-operation and Development (OECD). the bond market as well as stretched
Hamburg tailed off. Meanwhile, Q3 2017 was one many planned schemes have been pushed back
This long-awaited lift to global growth, supported by policy equity market valuations reinforce
of Frankfurt’s strongest quarters on record for the to 2018. At 5.3 million square metres (sqm),
stimulus, is being accompanied by solid employment gains, a the case for real estate investment, as
last 10 years. Other notable Q3 performances the 2018 European development pipeline will
moderate upturn in investment and a pick-up in trade growth. property can provide long and stable
include Madrid, Warsaw, Prague and Budapest. be more significant, with most of the increase
concentrated in London, Paris, Dublin, Berlin income flows. Furthermore, real estate
Furthermore, the political landscape at the close of 2017 potentially offers opportunities to add
and Munich.
was arguably much more positive than many would have value through active asset management.
dared hope at the outset. Resurgent support for centre-ground
parties in the Netherlands, France and Germany quelled Intense competition for limited
various far-right threats. Retail property supply in core markets
continues to exert downwards pressure
Following economic recovery and decreasing The availability of quality retail space
In the European economic realm, IHS Markit’s index on yields, with prime yields declining
unemployment, European countries are on Europe’s best high streets and in its best
of private-sector activity suggests that both services and in a number of markets in Q3 2017.
experiencing an increase in retail sales. However, shopping centres is limited, but availability of
manufacturing continue to strengthen, reaching levels not seen Despite Brexit-related uncertainty,
sales volume increases varied depending on secondary space remains high. Shopping centre
in more than six years. Current projections are for a continued prime London office yields remained
factors such as political uncertainty, terrorist development has been well below average for the
modest recovery in economic growth over the next few years, stable.
incidents, CPI inflation and weather. Retail sales past three years. According to Property Market
aided by a combination of European Central Bank (ECB) asset
growth is forecast to remain positive in 2018. Analysis (PMA), completions are expected to There is sufficient momentum in
purchases and strengthening labour markets.
increase year on year in 2017 , especially in the real estate market going into 2018
In many cases in 2017, retail sales volumes Finland, Portugal, Italy and Spain. to result in prime yields, on average,
Consumer spending, supported by improving labour
were boosted by price discounting. Retailer moving lower. However, we remain
market conditions and low interest rates, is expected to
profit margins continue to be squeezed by cost Retail park development has also been mindful of heightened global political
remain a key driver of economic growth. However, increasing
pressures as well as increasing competition, rising and is expected to increase, notably in risk, which could potentially upset the
inflation is expected to temper household spending recovery.
especially from e-commerce. Retailers will France. Small or outdated schemes are likewise investment cycle.
Countries forecast to enjoy the strongest consumer spending
likely remain cautious about expanding store being future proofed via redevelopment and
growth – largely because of either strong economic recovery Investor risk aversion as well as
networks and closing or disposing of non- refurbishment.
or solid consumer fundamentals – include Poland, Hungary, the economic environment of lower
performing stores and brands.
the Czech Republic, Spain and Ireland, whereas Finland, growth and lower-for-longer interest
Italy and the UK are projected to underperform. rates are forecast to result in a renewed
investor focus on prime real estate in
Industrial core markets. The risks to income are
likely to be higher for secondary than
Occupier demand for logistics space Speculative completions have increased, prime property. Consequently, yields
remained strong in 2017 and is expected to but there is a shortage of vacant, prime and for secondary assets may also come
remain healthy, boosted by growing e-commerce. modern space in Europe’s core logistics hubs. under upwards pressure as a result of
With low availability of prime logistics space, Urban logistics is set to be one of the most lower growth forecasts, investors’ flight
demand is moving beyond core locations, and significant growth markets of the next few years to safety and expectations that lenders
build-to-suit activity is increasing. Urban as e-commerce continues to grow across Europe. will have less appetite to lend on such
logistics may start to see innovative approaches assets.
to address increasing space requirements,
potentially resulting in a multistage model for
logistics real estate.You can also read
