Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management

Page created by Jerome Mills
 
CONTINUE READING
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
Outlook 2020
 Identifying opportunities in a late cycle
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
2                                                                                                                                                  3
                                                                                                                                   savillsim.com

OUTLOOK 2020

GLOBAL CONTACTS

        Kiran Patel
        Global CIO and Deputy Global CEO
        kiran.patel@savillsim.com

        Andreas Trumpp

                                            Preface
        Head of Research, Europe
        andreas.trumpp@savillsim.com

        Matthias Düsing
        matthias.duesing@savillsim.com

                                            Some things have not changed over the last       In fact, we believe that the lower-for-longer
        Matteo Vaglio Gralin                12 months: The US-China trade conflict is        interest rate environment is probably with us
        matteo.valigogralin@savillsim.com   still dominating global politics, geopolitical   for the next few years. Due to the scarcity of
                                            trouble spots have not calmed down and           alternative investment options, we anticipate
                                            uncertainty has not decreased significantly.     that the share of capital that investors
        Judith Fischer                      But in other respects, things have become        allocate to real estate will remain strong.
        judith.fischer@savillsim.com
                                            even more challenging for investors.
                                                                                             Investors can benefit from our local expertise
                                            With global growth disappointing in 2019 and     and on-the-ground-knowledge, supported
        Benedict Lai                        forecast to slow further in 2020, occupier       by in-house research and experienced teams
        benedict.lai@savillsim.com
                                            markets will probably be less dynamic than       in 16 offices across Europe and Asia-Pacific.
                                            the last few years. The European Central Bank    The Savills Investment Management Outlook
                                            (ECB) and the US Federal Reserve (Fed) have      2020 report features our views on the
        Hamish Smith                        changed tack, diverging from their expected      European and Asian commercial real estate
        hamish.smith@savillsim.com
                                            tightening paths to loosening monetary           markets, serving to help investors identify
                                            policy due to slowing economic growth rates      opportunities in a late-cycle environment.
                                            and persistently low inflation. As a result,
        Nicole Tiblom                       government bond yields have fallen further,      Andreas Trumpp,
        nicole.tiblom@savillsim.com
                                            which we think will prolong the real estate      Head of Research, Europe
                                            investment cycle for a while longer.

        Hilary Waterman
        hilary.waterman@savillsim.com
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
4                                                                                                                                                   5
                                                                                                                                    savillsim.com

Contents                                                                                                       38.
                                                                                                               Positioning for income and
06.                     12.                                                                                    growth in Asia-Pacific
Our top                 Physical retail will continue to evolve –
commercial real         but is here to stay
estate investment
picks

                                                                            18.
                                                                            Dynamic Cities: future
08.                                                                         proofing cities for long-term
Risks in 2020                                                               commercial real estate success

                                                                                                               40.
                                                                            20.                                Asia-Pacific real estate
                                                                                                               market overview
                                                                            European real estate
10.                     14.                                                 market overview
Extended                European logistics still to benefit
European office         from strong fundamentals in 2020
cycle a silver lining
for market players                                                          24.
                                                                            House views: Europe
                                                                            BELGIUM   IRELAND       PORTUGAL

                                           16.                                                                 42.
                                                                            PAGE 24   PAGE 29       PAGE 34

                                                                            DENMARK   ITALY         SPAIN

                                          Shift in monetary
                                                                            PAGE 25   PAGE 30       PAGE 35

                                                                            FINLAND   LUXEMBOURG    SWEDEN     House views: Asia-Pacific
                                          policy to low for long            PAGE 26   PAGE 31       PAGE 36

                                                                            FRANCE    NETHERLANDS   UNITED     AUSTRALIA       JAPAN
                                          EUROPEAN OFFICES: CAPITAL VALUE   PAGE 27   PAGE 32       KINGDOM    PAGE 42         PAGE 44
                                          GROWTH CYCLES                                             PAGE 37
                                                                            GERMANY   POLAND                   CHINA           SINGAPORE
                                          PAGE 17                           PAGE 28   PAGE 33                  PAGE 43         PAGE 45
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
6                                                                                                                                                                         7
                                                                                                                                                          savillsim.com

Our top commercial real
estate investment picks

                   Europe                                                             Asia-Pacific

                   OFFICE                                                             OFFICE

                   •   modern office buildings in well-connected areas in Brussels,   •   Grade B office space in Tokyo
                       Luxembourg, the fringe of central business district (CBD)      •   offices in regional Japanese cities and Melbourne
                       in the German top seven, Paris, Lyon, Milan, Copenhagen,
                       Helsinki, Oslo, Stockholm, Lisbon, Madrid, Barcelona,          •   supply-constrained submarkets or districts benefitting from
                       London, Kraków, Wrocław, and TriCity                               infrastructure improvements in China, such as Beijing’s
                                                                                          Zhongguancun market; business park offices or offices in
                   •   core/core-plus opportunities in Stockholm, German top              emerging growth corridors in Shanghai
                       seven and major provincials, Warsaw

                   •   refurbishment opportunities in the Netherlands
                                                                                      LOGISTICS
                   •   investment opportunities in London if there
                                                                                      •   logistics assets tied to e-commerce in China,
                       is more clarity on Brexit
                                                                                          Melbourne, Sydney

                   LOGISTICS
                                                                                      RETAIL
                   •   modern distribution centres along the main transport
                                                                                      •   well-located neighbourhood retail centres
                       corridors around Vienna, Paris, Lyon, Marseille, Ireland
                                                                                          in Sydney, Melbourne and Brisbane
                       (M50), Northern Italy and the Rome area, main German
                       logistics clusters, Sjaelland in Denmark, Helsinki, the
                       Swedish logistics triangle, hubs in Poland (such as Warsaw
                                                                                      RESIDENTIAL
                       and Wrocław), along the main transport corridors and
                       near main ports in Portugal, Madrid and Barcelona              •   multifamily accommodation for rent in subcore
                                                                                          districts of Greater Tokyo, Osaka, Nagoya and Fukuoka
                   •   urban logistics and smaller- to medium-sized warehouses
                       in the Netherlands (Bleiswijk), UK, major German
                       conurbations, Copenhagen, Stockholm, Helsinki,
                       Norway and selectively in Austria

                   RETAIL
                   •   prime retail parks in areas with positive long-term demand
                       prospects in the Netherlands, France, UK, Ireland, Germany,
                       Italy, and Sweden – preferably food-anchored assets that
                       include a service and experience offering

                   •   the outlet segment due to its resilience to e-commerce

                   •   prime high street assets with the right size and sustainable
                       rents in France, German top seven and major provincials,
                       London, large Italian cities, Copenhagen, Aarhus,
                       Stockholm, Lisbon, Madrid and Barcelona

                   •   the premium/luxury segment or areas with
                       high local and tourist footfall

                   ALTERNATIVES
                   •   student housing, retirement housing and hotels in Italy
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
8                                                                                                                                                                                                                                              9
                                                                                                                                                                                                                            savillsim.com

                                                                                                                            GEOPOLITICAL AND POLITICAL RISKS
                                                                                                                            The global macroeconomic landscape has been               US and China are also starting to broaden to include

Risks in 2020
                                                                                                                            characterised by heightened US-China trade tensions       economic, military and ideological dimensions,
                                                                                                                            and a looming slowdown over the past year. While          which have the potential to be long lasting by
                                                                                                                            reports suggest that the two countries are close to       reshaping the global economic and geopolitical
                                                                                                                            signing the first phase of a deal, there have been        landscape in the coming decades.
                                                                                                                            plenty of false starts before. And depending on the
                                                                                                                            scope of any initial agreement, downside risks will       The US-China dispute is not the only issue that is
                                                                                                                            continue to create uncertainty.                           shaping geopolitical and economic uncertainty. A
                                                                                                                                                                                      dispute between Japan and South Korea has the
                                                                                                                            US-China bilateral trade has already fallen by            potential to disrupt the high-end tech industries on a
                                                                                                                            about 20%, with a further decline likely absent           global scale as both countries play an important role
                                                                                                                            a deal. Sharp fluctuations in financial markets in        in the supply chain.
                                                                                                                            response to tariff announcements over the past
                                                                                                                            18 months and deteriorating business confidence           Other potential hotspots include the economic
                                                                                                                            indicate that investors and businesses have become        malaise in Latin America, the world’s worst
                                                                                                                            increasingly worried about the impact of trade policy     performing region in terms of economic growth in
                                                                                                                            developments.                                             2019. Meanwhile, tensions in the Middle East remain
                                                                                                                                                                                      an ongoing concern.
                                                                                                                            Should    global    trade   become   progressively
                                                                                                                            protectionist, businesses and consumers are more          Growing economic uncertainties in the context of the
                Hamish Smith                                                                                                likely to hold back on investment and spending            current late-cycle environment warrant caution, with
                                                                                                                            decisions, which are likely to exacerbate the             asset selection becoming even more important to
                                                                                                                            slowdown in economic growth. Tensions between the         commercial real estate investors.

                Nicole Tiblom
                                                                                                                         CURRENCIES                                                                       BREXIT
                                                                                                                         As the US-China trade conflict           of    China’s     foreign   exchange    After more than three and a half
                                                                                                                         continues and China allows the           reserves against the US. Any abrupt     years since the UK’s decision to
    LOW GROWTH, LOW INFLATIONARY WORLD
                                                                                                                         renminbi to depreciate further           decision to sell off China’s Treasury   leave the EU, during which there
    Consensus Forecasts indicates         At the same time, the external         to remain at very low levels, the       against the US dollar, there is a        holdings would likely lead to extreme   have been multiple extensions to
    that economic growth across the       backdrop is not showing signs of       region may remain trapped in            risk that the US administration          volatility across global markets.       the departure date, Brexit continues
    Eurozone will remain sluggish         improvement, with key surveys          a low growth, low inflationary          could intervene to weaken the                                                    to cast a cloud of uncertainty over
    over the next 12-18 months, but       pointing to a continued slowdown       environment in the absence of a         dollar. This would turn the trade        What’s more, if the US did try to       the UK. Although the chances of
    that the single currency area is      in US growth. Concerns about US        sizeable fiscal boost, otherwise        war into a currency war. The Trump       weaken the dollar, this would not       the UK crashing out without a deal
    unlikely to fall into recession.      growth and inflation prospects are     known as secular stagnation.            administration has already labelled      only raise political tensions, but it   have receded, such an outcome is
    However, the risks to this outlook    highlighted by the US Treasury                                                 China a currency manipulator and         would also likely upend financial       not completely off the table.
    appear to be to the downside.         curve     inverting    on    various   Against such a backdrop, we would       has threatened to devalue the            markets as other countries rush to
                                          occasions in 2019, which has been a    expect weaker occupier demand           dollar if trading partners engage in     depreciate their own currencies, with   While the 12 December 2019
    While      problems      in    the    good leading indicator of previous     and leasing activity. For landlords,    what China regards as competitive        an all-out currency war potentially     UK general election offers an
    manufacturing sector have not         US recessions. The changing            this means less competition for         currency devaluations. While it          sparking a global recession. Since      opportunity to resolve the political
    caused a major headache for           economic tides also forced the         space at a time when development        is unlikely that the Fed would           it is impossible for all countries to   impasse, a hung Parliament could
    the services sector, the longer       Fed to cut interest rates on several   pipelines in many cities are starting   intervene to devalue the dollar, if it   weaken their currencies relative        result in Brexit being further
    the downturn in manufacturing         occasions in 2019 in a pre-emptive     to rise. The combination of softer      did, potential targets to weaken the     to everyone else, there would           delayed, prolonging uncertainty
    lasts, the more likely the service    effort to avoid the economy falling    demand and higher supply would          dollar would most likely be the yen,     ultimately be winners and losers.       for businesses and investors alike.
    sector will start to feel the         into a recession.                      hurt rental growth prospects and        the renminbi, the euro and sterling.                                             Even if a withdrawal agreement
    reverberations.     Similarly,   if                                          could lead prospective occupiers                                                 For real estate investment, capital     is eventually passed and the UK
    consumer confidence were to           The implications of an recession       to seek increased incentives. In        But the greatest scope for global        flows would likely be skewed            leaves the EU, much would remain
    deteriorate further, households       for commercial property are clear.     addition, where rents are inflation     financial instability relates to the     depending on the relative strength      up in the air as both sides would
    are more likely to be inclined        But even if growth across Europe       linked, rental uplifts would be         US and China. China holds more           of the currency of respective           then enter into a further period of
    to increase their savings to the      remains positive, with monetary        lower. Taken together, returns          than USD 1 trillion of US Treasury       foreign investors, while returns in     negotiation to agree on the future
    detriment of consumer spending        policy    looking    increasingly      for investors are likely to be lower    securities. Therefore, a worst-case      local currency terms would also be      UK-EU trading relationship.
    growth.                               anaemic and interest rates likely      than currently assumed.                 scenario could be the weaponisation      affected.
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
 10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       11
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  savillsim.com

                                                                                                                                                                                                                                                                 FIGURE 2: Vacancy rates and future supply in selected European markets

                                                                                                                                                                                                                                                                                         22.5     0%       0%           0%       0%       1%        1%           0%          1%          2%         2%      1%     2%          4%       2%          0%          11%       0%        1%       1%      8%       2%      2%        0%            7%            4%           2%         100

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Pipeline u/c CBD (%; Q3 2019)
                                                                                                                                                                                                                                                                                         20.0                                                                                                                                                                                                                                                                                       90

                                                                                                                                                                                                                                                                  Vacancy rate CBD (%)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    80
                                                                                                                                                                                                                                                                                         17.5

Extended
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    70
                                                                                                                                                                                                                                                                                         15.0
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    60
                                                                                                                                                                                                                                                                                         12.5
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    50
                                                                                                                                                                                                                                                                                         10.0
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    40

European office
                                                                                                                                                                                                                                                                                         7.5                                                                                                                                                                                                                                                                                        30
                                                                                                                                                                                                                                                                                         5.0                                                                                                                                                                                                                                                                                        20
                                                                                                                                                                                                                                                                                         2.5                                                                                                                                                                                                                                                                                         10
                                                                                                                                                                                                                                                                                         0                                                                                                                                                                                                                                                                                           0

cycle a silver lining

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Madrid
                                                                                                                                                                                                                                                                                                  Munich

                                                                                                                                                                                                                                                                                                           Luxembourg

                                                                                                                                                                                                                                                                                                                        Berlin

                                                                                                                                                                                                                                                                                                                                          Hamburg

                                                                                                                                                                                                                                                                                                                                                    Paris City

                                                                                                                                                                                                                                                                                                                                                                 Barcelona

                                                                                                                                                                                                                                                                                                                                                                             Stockholm

                                                                                                                                                                                                                                                                                                                                                                                         Brussels

                                                                                                                                                                                                                                                                                                                                                                                                    Milan

                                                                                                                                                                                                                                                                                                                                                                                                            Rome

                                                                                                                                                                                                                                                                                                                                                                                                                               Dublin

                                                                                                                                                                                                                                                                                                                                                                                                                                        Frankfurt

                                                                                                                                                                                                                                                                                                                                                                                                                                                    Helsinki

                                                                                                                                                                                                                                                                                                                                                                                                                                                               Paris La
                                                                                                                                                                                                                                                                                                                                                                                                                                                               Defense

                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Vienna*

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             Oslo*

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Warsaw

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       London
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Westend

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Copenhagen*

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              London City

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Paris WBD

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          London
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Docklands
                                                                                                                                                                                                                                                                                                                                 Lisbon

                                                                                                                                                                                                                                                                                                                                                                                                                   Amsterdam

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Lyon*
for market players
                                                                                                                                                                                                                                                                                             Peak Vacancy rate CBD (%)       Trough Vacancy rate CBD (%)       Current Vacancy rate CBD (%; Q3 2019)
                                                                                                                                                                                                                                                                                             Pre-let pipeline u/c CBD (%; Q3 2019)    Speculative pipeline u/c CBD (%; Q3 2019)     Speculative pipeline u/c CBD as % of total market stock (%; Q3 2019)

                                                                                                                                                                                                                                                                 Source: Savills Investment Management based on PMA and various agents
                                                                                                                                                                                                                                                                 Note: *overall market

                                                                                                                                                                                                                                                                 Vacancy levels in several European                                                                                        according to the survey: 40% of                                                                    The scarcity of modern, Grade
                                                                                                                                                                                                                                                                 markets are the lowest since just                                                                                         Europe’s workers expect to leave                                                                   A space means we can still
                                                                                                                                                                                                                                                                 before the global financial crisis.                                                                                       their current job within the next                                                                  expect some rental growth in the
                                Matthias                                                    Nicole
                                                                                                                                                                                                                                                                 At the same time, development                                                                                             five years. Companies will need to                                                                 mid-term, albeit more limited than
                                Düsing                                                      Tiblom
                                                                                                                                                                                                                                                                 pipelines in most office markets                                                                                          look for talent hotspots in strategic                                                              in recent years. Central banks’
                                                                                                                                                                                                                                                                 are fairly low as a share of existing                                                                                     locations, as outlined in our Dynamic                                                              dovish    shift   has   significantly
        Slower economic growth in Europe is starting to feed                                                                                                                                                                                                     stock, PMA reports (figure 2).                                                                                            Cities report.1 Moreover, space                                                                    downgraded       expectations     for
        into softer occupier demand for offices. Although                                                                                                                                                                                                                                                                                                                                  will be used more efficiently and                                                                  interest rate rises, meaning it
        the annual take-up trend is weakening, levels remain                                                                                                                                                                                                     The economic slowdown alongside                                                                                           effectively, increasing productivity                                                               may take longer than expected
        healthy, according to PMA. The tech sector has been                                                                                                                                                                                                      structural changes including agile/                                                                                       and employee engagement as well                                                                    for property yields to bottom
        a key driver of tenant demand in many markets,                                                                                                                                                                                                           flexible   working,     technological                                                                                     as creating a stronger brand.                                                                      out,     extending    this     cycle.
        and this looks set to continue. Savills Research and                                                                                                                                                                                                     improvements and the war for                                                                                                                                                                                                 This is a potential silver lining
        Oxford Economics expect tech employment growth                                                                                                                                                                                                           talent are driving office trends. The                                                                                     The ongoing demographic shift                                                                      for office market players. We can
        to outperform overall office-based employment in                                                                                                                                                                                                         economic uncertainty means that                                                                                           will also impact office space.                                                                     expect investment volumes to hold
        most markets through 2024 (figure 1).                                                                                                                                                                                                                    firms must carefully manage their                                                                                         Intergenerational     working    has                                                               up rather well as the attractive
                                                                                                                                                                                                                                                                 cost base, including better office                                                                                        become more widespread, and                                                                        gap between office yields and
                                                                                                                                                                                                                                                                 space efficiency, while maintaining                                                                                       workplaces must strive to meet                                                                     government bond yields persists.
                                                                                                                                                                                                                                                                 or improving productivity levels.                                                                                         the demands of a more varied
FIGURE 1: Projected employment growth in major European markets                                                                                                                                                                                                                                                                                                                            workforce. In addition, tenants,                                                                   In this environment, investors would
                                                                                                                                                                                                                                                                 A survey by Savills Research                                                                                              landlords    and     investors    are                                                              benefit from focusing on income
                                                                                                                                                                                                                                                                 highlights the changing nature of                                                                                         increasingly      interested       in                                                              protection and enhancement to
   14
                                                                                                                                                                         Total employment growth (%, 2019-24)                                                    office markets and tenant demand.                                                                                         environmental,        social     and                                                               ensure portfolios are structurally
   12
                                                                                                                                                                         Office-based employment growth (%, 2019-24)                                             While the basics of comfort, air                                                                                          governance (ESG) issues. According                                                                 resilient to weather a downturn
   10
                                                                                                                                                                         Tech employment growth (%, 2019-24)                                                     quality and lighting continue to                                                                                          to a survey by Savills IM,2 worker                                                                 and other structural challenges.
   8
                                                                                                                                                                                                                                                                 be important draw factors for                                                                                             well-being as well as health and                                                                   High-quality real estate assets
   6
                                                                                                                                                                                                                                                                 occupiers, so too are the length of                                                                                       safety remain the most important                                                                   with a stable source of income
   4
                                                                                                                                                                                                                                                                 commute to work, quality of wi-fi                                                                                         social issues. The survey also                                                                     can provide a safe haven in the
   2                                                                                                                                                                                                                                                             and availability of quiet space for                                                                                       revealed that 31% of respondents                                                                   current     environment.    Regional
   0
                                                                                                                                                                                                                                                                 focused work.                                                                                                             believe that it will take only three                                                               office markets where availability
   -2
                                                                                                                                                                                                                                                                                                                                                                                           to five years until green-lease                                                                    is tight and pipelines small may
          Berlin

                   Copenhagen

                                Madrid

                                                     Stockholm

                                                                 Munich

                                                                          Helsinki

                                                                                     Oslo

                                                                                             Frankfurt

                                                                                                         Paris

                                                                                                                 Luxembourg

                                                                                                                                       Dublin

                                                                                                                                                Manchester

                                                                                                                                                             Hamburg

                                                                                                                                                                       Amsterdam

                                                                                                                                                                                   Rome

                                                                                                                                                                                          Birmingham

                                                                                                                                                                                                       Edinburgh

                                                                                                                                                                                                                   Warsaw

                                                                                                                                                                                                                                     Lisbon

                                                                                                                                                                                                                                              Milan

                                                                                                                                                                                                                                                      Brussels
                                         Barcelona

                                                                                                                              London

                                                                                                                                                                                                                            Vienna

                                                                                                                                                                                                                                                                 Employers across Europe report                                                                                            clauses are universally implemented                                                                look attractive from a pricing
                                                                                                                                                                                                                                                                 talent retention as their single                                                                                          between tenants and real estate                                                                    perspective.
                                                                                                                                                                                                                                                                 biggest challenge across Europe,                                                                                          investment managers.

Source: Oxford Economics (Autumn 2019)
Notes: Total employment growth refers to the % change between 2019 and 2024 in all sectors. Office employment growth refers to the % change between 2019                                                                                                         1. For more information, visit dynamiccities.savillsim.com.
and 2024 in information & communication; financial & insurance activities; professional, scientific & technical activities; administrative & support activities; public                                                                                          2. The survey polled 112 institutional investors involved in commercial real estate, based in Europe, the Middle East and Africa; North America; and Asia-Pacific. For
administration & defence. Tech employment growth refers to the % change between 2019 and 2024 in information & communication.                                                                                                                                       more on this survey, stay tuned for the 2019 ESG Report, coming in Q1 2020.
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
12                                                                                                                                                                                                                                                                          13
                                                                                                                                                                                                                                                       savillsim.com

Physical retail will
continue to evolve –
but is here to stay

                 Hamish                       Andreas
                 Smith                        Trumpp      FIGURE 1: UK buyers still prefer to shop in store                                                                                         FIGURE 2: Online penetration of food sales remains very
                                                          (reasons for not purchasing online)                                                                                                       low (% of 2018 UK retail sales made in store or online)

     Technological developments, together with
                                                                                                % of respondents
                                                                                                                                     TAKE THREE EXAMPLES
                                                                                                                                                                                                                                                        Store    Internet
     demographic shifts and changing consumer                 Prefer to shop in person
     behaviour, are driving significant changes                                                                                            Grocery stores are relatively immune to economic                Food
     across the European retail sector. Smart                                                                                              downswings as people still need to meet basic food
     devices have added a new dimension to                                                                                                 and beverage needs. And with the complication                   Textile clothing and footwear
     consumer shopping behaviour. Although                    Payment security or privacy concerns                                         of delivering perishable goods, many people still
     consumer      purchasing       patterns     are                                                                                       prefer to shop in store, making the segment less
     transforming traditional retailer supply chains                                                                                       vulnerable to online shopping (figure 2). In this late          Other nonfood
     and cost models at the same time, demand                                                                                              stage of the property cycle, for investors seeking
     for physical retail is not dead. Indeed, even            Uncertainty around how to shop online                                        asset-backed, secure income streams, food retail                Nonfood
     in the UK, which leads Europe in terms of                                                                                             on long, inflation-linked leases looks attractive.
     the share of retail sales made online, more
                                                                                                                                                                                                           Department stores
     than 80% of adults who had not shopped                                                                                                Outlet centres are increasingly popular and tend
     online within the past 12 months stated a                Uncertainty around how to shop online                                        to be defensive against the rapid growth in online
     preference to shop in store (figure 1).                                                                                               retail. For customers looking for a ‘great day                  Household goods
                                                                                                                                           out’ shopping experience, web browsing will not
     Furthermore, the net number of retail stores                                                                                          suffice. Outlet centres can drive performance
                                                              Delivery of goods ordered over the Internet is a problem                                                                                     Nonstore retailing
     across Europe did continue to rise in the first                                                                                       through a strong leisure offering, leading to higher
     half of 2019, according to PMA data.                                                                                                  turnover and higher footfall.
                                                                                                                                                                                                       0      10   20    30     40    50        60     70   80   90    100
     Nonetheless, with constant headlines –
                                                                                                                                                                                                       Source: Office for National Statistics
     particularly in the UK – about retailers                                                                                              Retail parks in reach of a large catchment and
     shuttering stores or undergoing voluntary                Concerns about delivery of items                                             anchored by major supermarkets, pharmacy
     insolvency proceedings, it is not hard to                                                                                             and household goods retailers can also provide           Retail will continue to evolve as technology and
     see why retail is a hard sell for investment                                                                                          some interesting possibilities from a convenience        consumer preferences drive changes to existing
     committees.                                                                                                                           retailing perspective. By increasing food, beverage      formats as well as new retail concepts. While we
                                                              Don’t have a suitable payment card
                                                                                                                                           and leisure offerings, active management by              do not underestimate the scale of the challenges
     But not all retail is equal. We see pockets                                                                                           landlords can provide consumers with more reason         for retailers and investors, those retail formats
     of opportunity in the sector, particularly in                                                                                         to visit while boosting dwell times and consumer         that fail to adapt quickly run the risk of becoming
     formats where shoppers make a conscious                                                                                               spending. Retail parks also have the advantage of        outdated, meaning more active asset management
                                                              Someone does it on their behalf
     decision to travel to a location. In this respect,                                                                                    space, which allows click and collect options to be      is required. With a focus on destination and
     we prefer focusing on assets or segments that                                                                                         included. However, investors need to be mindful of       convenience segments of the market, we think
     offer consumers experience or convenience                                                                                             nearby competition and connectivity with respect         attractive risk-adjusted returns are still available
     options – areas of retail that we believe are           0      10      20     30      40         50   60   70   80   90   100         to public and private transport.                         for investors who select assets that can withstand
     more resilient to the disruption of changing                                                                                                                                                   and benefit from technological change and
                                                             Source: Office for National Statistics
     shopping habits.                                                                                                                                                                               demographics.
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
 14                                                                                                                                                                                                                                                                                        15
                                                                                                                                                                                                                                                                           savillsim.com

European logistics still to benefit from                                                                                                                      FIGURE 1:
                                                                                                                                                              Industrial and logistics corridors in Europe

strong fundamentals in 2020

                      Judith Fischer                           Matteo Vaglio Gralin

      2019 was another strong year                          the most important traditional                          Looking ahead, occupier demand
      for European logistics demand,                        European     economic    centres                        drivers will be affected by the weak
      primarily driven by logistics                         and logistics hubs. According to                        European economic outlook and
      operators       and     e-commerce.                   bulwiengesa, the Golden Banana                          rising operating costs. However,
      Strong investor appetite and lack                     refers to a Southern European                           the sector is set to benefit                                                                                                               COPENHAGEN
      of modern space led to further                        conurbation      lying  between                         from structural changes such
      yield compression in the larger                       Valencia, Spain, and Genoa, Italy,                      as the implementation of new
      markets. Compared with most                           along the Mediterranean coast                           technologies,      automation    and                                                                                                    HAMBURG
      office and retail sectors, logistics                  (figure 1).                                             changes in consumer habits. Our                                                                                              HANNOVER
                                                                                                                                                                                                                           LONDON
      assets still offer an attractive risk-                                                                        view for 2020 is that rental growth                                                                                                            BERLIN
                                                                                                                                                                                                                                               RUHR                               WARSAW
      return profile.                                       The emerging Purple Banana                              will be moderately positive in most                                                                                                        LEIPZIG
                                                            corridor stretches from Germany’s                       European markets, but weaker                                                                                   BRUSSELS    FRANKFURT
      Not only proximity and accessibility                  Ruhr area to Warsaw and beyond.                         compared with the last few years.
                                                                                                                                                                                                                                                                      PRAGUE
      to producers and consumers                            Poland is a key country for the
                                                                                                                                                                                                                        PARIS                  STUTTGART
      but also affordable operating                         logistics business in Eastern                           A key challenge for rental growth
      costs are key for further growth                      Europe due to its relatively                            prospects is that completions and                                                                                                        MUNICH
      in the logistics sector. There are                    low labour costs, availability                          the     share       of     speculative                                                                                                               VIENNA
      three established and emerging                        of    development      sites,   good                    developments          are    on     the                                                                                                                         BUCHAREST
                                                                                                                                                                                                                                              ZURICH
      industrial and logistics corridors                    connections to Western Europe                           rise.   In    addition,      occupiers                                                                  LYON
      in Europe that represent about                        (albeit longer transport times)                         are     consolidating,       divesting
      40% of Europe’s population and a                      and its strategic location along                        themselves of old space in order
                                                                                                                                                                                                                                               MILAN
      similar share of overall European                     the New Silk Road stretching from                       to take modern and efficient space.
      GDP.1                                                 China to Europe. Development                            We expect the investment market
                                                            initiatives such as the New Silk                        to remain healthy in 2020 due to
      The so-called Blue Banana is                          Road       offer    new      business                   a large volume of available capital
      a corridor that stretches from                        opportunities,     while      ongoing                   and attractive yields compared with                                               MADRID        BARCELONA                               ROME
      the Midlands in the UK through                        urbanisation leads to higher city                       other sectors. However, transaction
      Belgium, the Netherlands, Western                     population densities and changing                       volumes are likely to slow due to
      Germany and Switzerland, ending                       consumer behaviour. Last-mile                           scarcity of Grade A stock. Given
      in Northern Italy (figure 1). This                    assets and multistorey warehouses                       the strong competition for prime
      corridor is home to around 168                        will play a key role.                                   assets, there is still room for further
      million people2 and includes                                                                                  yield compression next year.

1. Oxford Economics, Savills Investment Management
2. Savills Investment Management calculations based on Oxford Economics, total population at a NUTS 1 or 2 level.                                             Sources: bulwiengesa, Savills Investment Management
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
16                                                                                                                                                                                                                                                                                          17
                                                                                                                                                                                                                                                                           savillsim.com

Shift in monetary policy                                                                                                                                               European offices: capital
to low for long                                                                                                                                                        value growth cycles
                                                                                                                                                                                     Given the current backdrop, investors would benefit from focusing
                                                                                                                                                                                     on income protection and enhancement to ensure portfolios are well
                     Nicole Tiblom                                                                                                                                                   placed in case of a downturn. We advocate focusing on opportunities
                                                                                                                                                                                     that are defensive in this respect. Asset, lease and location selection
     More than 30 central banks around the world,                                       the economic slowdown, the risk premium         for                                          remain key components of underwriting.
     including the Fed and ECB, cut interest rates in                                   commercial real estate looks relatively attractive
     2019 amid rising concerns over global growth, lower                                in this low-interest-rate, low-return environment
                                                                                                                                                                                     FIGURE 2: European office capital value growth cycles
     inflation and weaker inflation expectations. Such                                  (figure 1). Consequently, we can expect real estate
     concerns in financial markets also resulted in global                              investment volumes to hold up rather well in 2020                                                220

     government bond yields falling further – in many                                   as investors seek safe-haven assets in their hunt
                                                                                                                                                                                         200
     developed market cases, into negative territory. As a                              for income.
                                                                                                                                                                                         180
     result, we can expect investors’ share of capital being
     allocated to real estate to increase going forwards,                               Assuming the economic slowdown does not lead to a                                                140

     partly reflecting the lack of alternative ‘safe,’ income-                          major recession, the switch to more accommodative                                                120

     generating investment options.                                                     monetary policy implies that the current property                                                100
                                                                                                                                                                                                                                                                           1990-1996
                                                                                        cycle will be prolonged further, which is positive                                                                                                                                 1996-2003
                                                                                                                                                                                         80
     Heightened global uncertainty could also have                                      for commercial real estate investment. However,                                                                                                                                    2003-2009
                                                                                                                                                                                                                                                                           2009-2020
                                                                                                                                                                                         60
     implications for commercial real estate demand,                                    property cycles are undeniably enmeshed with the                                                        0      1      2        3      4       5       6       7      8       9      10       11
     resulting in lower investment appetite and consumer                                economic cycle, and we assess that the European real
     confidence, rising financial market volatility and                                 estate market is generally in the final phase of the                                         Sources: PMA (Autumn 2019), Savills Investment Management
                                                                                                                                                                                     Note: Index starts the first year of positive capital value growth, so the duration and the start of
     disruption in global supply chains. However, despite                               demand cycle.                                                                                the cycle is dynamic.

     FIGURE 1: Commercial real estate risk premium over government bonds                                                                                                             The capital value growth cycle is expected to be prolonged through
                                                                                                                                                                                     2020 due to further rental growth and yields moving in further.
         7.0                      Average 10y government bond yield (%, unweighted)
                                  Prime office yield (%)
                                  Prime retail yield (%)
                                                                                                                                                                                     FIGURE 3: Office capital value growth index – last cycle trough through 2020
         6.0
                                  Prime logistics yield (%)
         5.0                                                                                                                                                                              340         Paris: Central       Madrid
                                                                                                                                                                                          320         Frankfurt            London: Central
         4.0                                                                                                                                                                              300         Milan                Warsaw
                                                                                                                                                                                          280         Amsterdam            Stockholm
         3.0                                                                                                                                                                              260
                                                                                                                                                                                          240
         2.0                                                                                                                                                                              220
                                                                                                                                                                                          200
         1.0                                                                                                                                                                              180
                                                                                                                                                                                          160
         0.0                                                                                                                                                                              140
                      APAC '06                 APAC '19                 Euro '06                Euro '19                 US '06                   US '19                                  120
                                                                                                                                                                                          100
                                                                                                                                                                                          80
                                                                                                                                                                                                0      1       2       3      4       5       6       7      8       9      10       11
     Sources: PMA, JLL, Savills Investment Management
     Notes: APAC: Brisbane, Melbourne, Perth, Sydney, Beijing, Guangzhou, Shanghai, Shenzhen, Hong Kong, Nagoya, Osaka, Tokyo, Kuala Lumpur, Singapore
     & Seoul; Euro: Vienna, Brussels, Prague, Copenhagen, Helsinki, Lille, Lyon, Marseille, Paris: Central, Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich,                 Sources: PMA (Autumn 2019), Savills Investment Management
     Stuttgart, Budapest, Dublin, Milan, Rome, Luxembourg, Amsterdam, Rotterdam, Oslo, Warsaw, Lisbon, Barcelona, Madrid, Stockholm, Birmingham, Edinburgh,
                                                                                                                                                                                     Note: Index starts (=100) the last year of negative capital value growth (range 2009-13), so the
     Glasgow, London: Central, M25 West & Manchester; US: Atlanta, Austin, Baltimore, Boston, Charlotte, Chicago, Cincinnati, Cleveland, Columbus, Dallas, Denver,
                                                                                                                                                                                     duration and the start of the cycle are dynamic.
     Detroit, East Bay, Fairfield, Fort Lauderdale, Fort Worth, Grand Rapids, Hampton Roads, Houston, Indianapolis, Jacksonville, Kansas City, Long Island, Los
     Angeles, Louisville, Miami-Dade, Marin Country, Milwaukee, Minneapolis-St. Paul, Nashville, New Jersey, New York, Northern Virginia, Oakland, Orange County,
     Orlando, Philadelphia, Phoenix, Pittsburgh, Portland, Raleigh-Durham, Richmond, Sacramento, Salt Lake, San Antonio, San Diego, San Francisco, San Francisco
     Mid-Peninsula, Seattle-Puget Sound, Silicon Valley, St. Louis, Sonoma County, Suburban Maryland, Tampa Bay, Washington D.C, West Palm Beach, Westchester;
     US 2019 data based on Q1; Euro and APAC data is based on Q3.
Outlook 2020 Identifying opportunities in a late cycle - Savills Investment Management
OUTLOOK 2020
18                                                                                                                                                                                           19
                                                                                                                                                                            savillsim.com

                                                                                                  WHY DOES THIS MATTER FOR CRE?
                                                                                                  Future CRE market performance is dependent on economic growth, wealth,
                                                                                                  technology and population trends. Rising employment, be it through the expansion of
                                                                                                  existing businesses or the engendering of new firms, helps support the office sector
                                                                                                  as demand for office space grows. The retail sector gains from growing consumer
                                                                                                  expenditure. This, in turn, is also positive for e-commerce growth, which is dependent
                                                                                                  on functioning logistics infrastructure. In a longer-term context, the three CRE
                                                                                                  markets of the top 10 dynamic cities demonstrate the strongest upwards trend in
                                                                                                  prime total returns, followed by the next-best-30 cities . Such office market trends are
                                                                                                  shown in figure 1.

                                                                                                  FIGURE 1: Prime annual office total return trend lines

Future proofing cities for long-term                                                                  30

                                                                                                      25
commercial real estate success                                                                        20

                                                                                                      15

                                                                                                      10

                                                                                                       5

                                                                                                       0
                  Judith Fischer
                                                                                                      -5                                                   Top 10 DC
                                                                                                                                                           Next-best-30 DC
     Europe stands among the most          growth and talent retention. It                            -10                                                  Other
                                                                                                                                                           Trend (Top 10 DC)
     urbanised regions worldwide,          highlights which European cities                           -15                                                  Trend (Next-best-30 DC)
     with nearly 75% of the region’s       are best equipped to handle                                -20
                                                                                                                                                           Trend (Other)
     population now living in cities.      future growth in a sustainable                                      2000 2002       2004 2006 2008    2010    2012      2014   2016    2018
     The United Nations projects that      way, and the extent to which a
     this percentage will reach 84%        city is future proofed hinges on     INFRASTRUCTURE    Sources: PMA, Savills Investment Management
     by 2050.                              its ability to attract investment.

     Cities are engines of economic        Future proofing requires the                           The leading 2019 Dynamic Cities (top 20 featured in figure 2) are enjoying
     growth. Less than 100 major           right combination of soft and                          infrastructure investment and well-developed or developing knowledge networks.
     European cities produce more          hard infrastructure, which is                          They are also supported by a backdrop of universities, strong cultural amenities and
                                                                                INCLUSION
                                                                                                  good governance structures, which foster enterprise. Together, these factors help
     than 30% of Europe’s GDP,             critical to support the expansion                      cities attract and retain highly skilled labour, allowing them to take advantage of
     according to Oxford Economics.        of a city’s population and                             urbanisation and making them resilient to disruptive technology.
     This places European cities firmly    physical size. Successful cities
     in the limelight for commercial       of the future need seamless                            FIGURE 2: Top 20 Dynamic Cities 2019
     real estate (CRE) investment.         transport     of    people   and     INTERCONNECTION
                                           information, which facilitates                           RANK
                                                                                                                   CITY
                                                                                                                                     CHANGE     RANK
                                                                                                                                                            CITY
                                                                                                                                                                                 CHANGE
                                                                                                    2019                             2018-19    2019                             2018-19
     However,      not      all   cities   ease of doing business and
                                                                                                           1       London                           11      Zurich
     experience the positive effects       encourages growth.
                                                                                                           2       Paris                            12      Oxford
     of urbanisation equally. Given
                                                                                                                                                    13      Edinburgh
     ongoing structural changes such       Digital connectivity in the          INNOVATION
                                                                                                           3       Cambridge

     as disruptive technology, ageing      form of strong broadband                                        4       Berlin                           14      Barcelona

     populations and environmental         and mobile infrastructure is                                    5       Amsterdam                        15      Copenhagen

     challenges, it is vital to identify   necessary for innovation as                                     6       Munich                           16      Frankfurt am Main

     those cities that are likely to       future technologies develop.                                    7       Dublin                           17      Vienna
     show resilience to change.            A successful city must also be       INSPIRATION                8       Lausanne                         18      Bern
                                           walkable, cyclable and have a                                   9       Basel                            19      Oslo
     The Savills IM Dynamic Cities         good spread of public transport,                                                                         20      Madrid
                                                                                                           10      Stockholm
     index examines six factors that       which helps reduce the risk of
     in combination contribute to          location-, employment- and                             Source: Savills Investment Management
     long-term wealth, economic            income-based disparities.            INVESTMENT
OUTLOOK 2020
20                                                                                                                                                            21
                                                                                                                                              savillsim.com

European real estate
market overview                                                                                     SOFTER OFFICE OCCUPIER DEMAND LIKELY,
                                                                                                    BUT VACANCY STILL LOW IN MOST MARKETS

                                                                                                    Office markets are still in good shape heading into the new
                                                                                                    year, despite the slowdown in economic growth. Unlike
                                                                                                    the manufacturing sector, which has seen output shrink,
                                                                                                    the service sector has held up relatively well so far, and
                                                                                                    employment growth remains positive. However, Oxford
                                                                                                    Economics reports suggest office employment growth
                                                                                                    in the Eurozone will slow to about 0.7% per annum (p.a.)
                                                                                                    over 2020-24, from 1.8% p.a. between 2015 and 2019. We
                                                                                                    expect this will feed into softer occupier demand over the
                                                                                                    next few quarters.
                  Andreas Trumpp
                                                                                                    Even so, vacancy rates are likely to remain low, particularly
                                                                                                    for Grade A buildings in central city locations. While
                                                                                                    development pipelines continue to pick up across Europe,
     Overall, the outlook for pan-European occupier markets in 2020
                                                                                                    they are still low as a share of existing stock in the
     is weaker than during the last few years. Independent forecasters
                                                                                                    majority of markets, PMA reports. In addition, speculative
     expect economic growth to remain subdued over the next
                                                                                                    development activity has been constrained across Europe,
     12-18 months as global demand loses momentum and a number                                      too. Thus, even as occupier demand slows and current
     of geopolitical risks remain unresolved. While the Eurozone is                                 constraints on supply ease somewhat, markets appear
     expected to avoid tipping into recession, some economies such                                  unlikely to see a major oversupply of office space in the
     as Germany and Italy are struggling. The commercial property                                   coming years.
     investment market cycle is likely to be prolonged by the ECB’s
     decision to cut interest rates further and restart its asset purchasing                        For this reason, we think that there is scope for further,
     programme. But a lackluster economic outlook implies headwinds                                 but slower, rental growth in CBD and central city locations
     for occupier demand and rental growth.                                                         in the short term. Given concerns about the pricing of
                                                                                                    core assets, regional markets where availability is tight
                                                                                                    and pipelines small may look attractive. However, good
                                                                                                    local knowledge is essential when considering assets in
                                                                                                    these markets.

     EXTERNAL FACTORS ARE SUPPORTING THE INVESTMENT MARKET                                          Although the ECB’s looser monetary policy settings could
                                                                                                    see some yields move in a touch more, in general we would
     Due to a slow start to 2019, pan-European       Second, due to very limited alternative
                                                                                                    advise against value-add and opportunistic strategies
     investment volumes look likely to come in       investment opportunities and challenging
                                                                                                    dependent on economic growth, strong employment
     lower than in 2018, data from Real Capital      pricing in the core segment, risk-averse
                                                                                                    prospects or further yield compression. Rather, we favour
     Analytics (RCA) suggest. However, lower         core investors in particular are starting
                                                                                                    long income streams at this point in the cycle.
     investment volumes do not necessarily           to extend the holding tenure of their
     signal lower demand for property. Supply-       investments despite attractive pricing for
                                                                                                    We prefer CBD, fringe-of-CBD and central city locations
     side constraints are limiting investor          sellers. This partially explains why yields
                                                                                                    where buildings are located close to good transport
     activity on two fronts.                         have hardened further, particularly in the
                                                                                                    infrastructure. Markets where modern, efficient office
                                                     office and logistics sector. We believe
                                                                                                    space is in short supply can still provide some interesting
     First, there is a persistent scarcity of        that low risk-free rates potentially provide
                                                                                                    opportunities. For investors who are prepared to take on a
     new developments and refurbishments             scope for additional, albeit limited, yield
                                                                                                    little more risk, multi-let assets with short lease lengths in
     in the most sought-after core locations.        compression in some markets.
                                                                                                    central locations provide opportunities for rental growth
                                                                                                    via active asset management.
OUTLOOK 2020
22                                                                                                                                                                                                                    23
                                                                                                                                                                                                    savillsim.com

     DESPITE STRUCTURAL CHANGES, PHYSICAL RETAIL IS NOT DEAD
     Oxford Economics predicts that retail           have, so far, been more resilient to
     sales in the European Union (EU-28) and         competition from online can be broadly
     Eurozone will grow by 1.9% and 1.6%,            split into two categories: experience and
     respectively, in 2020. While this is slightly   convenience shopping. (We explore this
     below the average over the last five            further in our ‘Physical retail will continue
     years, it is still notably above the long-      to evolve – but is here to stay’ section.)
     term average. Consumer confidence
     dipped in 2019 but was still relatively         Even so, we believe that rental growth
     high, as households benefitted from             prospects in the retail sector are limited
     increasing employment and stronger              to certain locations and assets in major
     wage growth across most of the EU-28.           European cities due to subdued overall
     Indeed, unemployment is at its lowest           occupier demand and cost pressure on
     rate in more than 10 years. In spite of         physical retailers.
     economic headwinds, Oxford Economics
     expects unemployment to fall slightly           We prefer focusing on assets that offer
     further in 2020.                                experience (e.g., luxury or outlet centres)
                                                     or convenience shopping formats (e.g.,
     Online retail will continue to challenge        retail parks or infrastructure retail such
     and shape the future of traditional brick-      as that in railway stations), which have
     and-mortar stores. However, physical            limited nearby competition and are easily
     retail is not dead. Retail formats that         accessible to large catchment areas.

                                                                                                     E-COMMERCE IS A                     However, it is important to           we expect this to limit rental
                                                                                                                                         note that logistics is not all        growth prospects in 2020.
                                                                                                     GROWING ELEMENT
                                                                                                                                         about e-commerce. Traditional         Further ahead, investors must be
                                                                                                     OF LOGISTICS                        occupiers such as manufacturers       mindful of potential risks to the
                                                                                                     DEMAND, BUT NOT                     remain an important source            sector, particularly in the form
                                                                                                     THE ONLY ONE                        of       occupier      demand.        of government intervention to
                                                                                                                                         Notwithstanding the current           support high street retail such as
                                                                                                                                         weakness in the manufacturing         an online sales tax, which could
                                                                                                     With the structural changes to      sector, these firms are facing        hurt online sales demand.
                                                                                                     the way people shop continuing      high relocation costs. As such,
                                                                                                     to evolve – and very different      locations around manufacturing        Accessibility to main transport
                                                                                                     levels of online penetration        hubs with strong transport            networks and labour are crucial
                                                                                                     across European – demand            connectivity can also provide         ingredients in the logistics recipe.
                                                                                                     prospects for logistics assets      good investment opportunities.        As such, investors should focus
                                                                                                     continue to look solid. Savills                                           on large modern distribution
                                                                                                     Research expects e-commerce         Slower economic growth will           warehouses that are close to
                                                                                                     sales as a percentage of overall    likely be a headwind for industrial   main transport networks as
                                                                                                     retail sales in Western Europe to   and logistics demand going            well as smaller urban facilities
                                                                                                     grow further to 15% in 2023 from    forwards. Against a background        within, or nearby, large and high-
                                                                                                     11% in 2019.                        of rising development activity,       density cities.
OUTLOOK 2020
 24                                                                                                                                                                                              25
                                                                                                                                                                                 savillsim.com

BELGIUM
Country analyst: Judith Fischer
                                                                              DENMARK
                                                                              Country analyst: Nicole Tiblom

                ECONOMY                                                                       ECONOMY
      Oxford Economics expects economic growth to remain subdued                    Domestic demand should continue to be the key driver of growth in Denmark as low
      in 2020 at around 1.1% – slightly slower than the 1.2% expected               unemployment and moderate inflation support households’ real income. The external
      in 2019. The national unemployment rate is at a historically low              sector is likely to slow due to weak global trade and rising uncertainties. The Danish
      level. However, unemployment is likely to rise, according to Oxford           central bank matched the ECB’s deposit rate cut in September, which will likely keep
      Economics, which is of potential concern for occupier demand,                 investments at a healthy level, Oxford Economics reports.
      particularly in fringe and noncentral city areas due to deteriorating
      employment intentions in the industrial and retail sectors.

                                                                                              OFFICE
                                                                                    The occupier market benefits from high demand due to the positive economic
                OFFICE                                                              environment, and the lack of modern space is forcing many occupiers towards the
      Strong demand for office space in Brussels and historically                   outer parts of Copenhagen. There is a continued interest in shared workspace by
      low vacancy rates are putting upwards pressure on rents.                      occupiers, and investors are focusing more on accommodating smaller and shared
      The Brussels investment market remains competitive, which is                  office areas with more flexible office agreements, according to C&W.
      putting downwards pressure on yields. Brussels office yields,
      however, remain attractive compared with other major                          We see opportunities in the fringe central Copenhagen area where rental prospects
      European office markets.                                                      are positive due to the robust economic environment, limited supply and positive
                                                                                    long-term demand prospects.
      For leases of more than 12 years with high-quality tenants, prime
      yields are below 4% depending on the age of the building.
      For six- to nine-year leases, yields stand at 4%, according to BNP                        LOGISTICS
      Paribas Real Estate (BNPPRE). Going forwards, yields should
                                                                                    Recent years’ positive economic environment has led to companies expanding their
      remain stable or compress at a slower pace. We like modern
                                                                                    businesses and demanding more space to facilitate growth and optimise their supply
      office buildings in well-connected areas of Brussels.
                                                                                    chain. However, the Danish logistics market is small, with a very limited supply of
                                                                                    modern facilities. From a historical perspective, though, transaction volumes are
                                                                                    higher, with a broadening investor base.
                   LOGISTICS
      Speculative development remains very low due to the strong                    Demand is focused on modern premises along the main transport network. Rental
      demand for build-to-suit assets and developers’ risk-averse                   levels are rising, with the strongest rental growth noted around Køge and Greve. We
      approach. Prime rents for semi-industrial logistics assets should             prefer modern warehouses and last-mile distribution facilities along the main Danish
      remain stable in 2020, Cushman & Wakefield Research (C&W)                     transport corridors on Sjælland, where demand for modern logistics is growing. The
      reports. The major logistics axes in Belgium, Brussels-Antwerp and            Danish logistics market is expected to be further supported by the Fehmarn Belt link.
      Antwerp-Ghent have attracted the highest demand for logistics
      space over the last few years.

      Investor appetite remains strong but there is a lack of available                      RETAIL
      product that is limiting transaction volumes. The supply-demand               Prime high street yields have risen slightly in Copenhagen, driven by the uncertainty
      imbalance is also putting downwards pressure on yields, which                 around structural changes in retail, according to RED (Cushman & Wakefield). The
      are, however, still higher than in neighbouring countries such as             polarisation in the retail market is clear, with strong appetite for high-quality assets
      Germany, the Netherlands and France.                                          in prime locations. Parts of Strøget are struggling with vacancies, while international
                                                                                    brands are competing for the best assets around Amagertorv and Østergade. The
                                                                                    structural changes in the retail market mean more asset management is required, and
                                                                                    the polarisation between successful and unsuccessful formats can partly be explained
               RETAIL                                                               by a gap between professionally and non-professionally managed assets.
      Structural changes in the Belgian retail sector are in line with
      the wider European trend. Yet appetite for retail investments                 Despite increasing competition from online sales, Copenhagen’s pedestrian zone
      is generally lower. There are some areas of greater resilience,               is seeing strong footfall, particularly around Amagertorv and Købmagergade.
      however, such as convenience-led out-of-town retail, C&W reports,             Interest in secondary assets is limited and there is a strong focus on pricing.
      with good accessibility by car and plenty of parking spaces.                  We like Copenhagen high street opportunities around Købmagergade, where
      Food-anchored retail is also a dynamic sector that is proving                 occupier interest is robust, as well as in regional cities with positive long-term
      resilient amid changing consumer behaviours.                                  demand prospects such as Aarhus.
OUTLOOK 2020
 26                                                                                                                                                                                         27
                                                                                                                                                                            savillsim.com

FINLAND
Country analyst: Nicole Tiblom
                                                                       FRANCE
                                                                       Country analyst: Matteo Vaglio Gralin

                ECONOMY                                                                ECONOMY
      The Finnish economy is slowing, with domestic demand                   Oxford Economics projects that the French economy will grow 1.2% in 2020, almost
      likely to moderate over the next few years while remaining             in line with 1.3% expected in 2019. Performance is slightly above the Eurozone
      the bright spot in the economy as the external outlook is              average, and unemployment is set to keep falling in 2020. Domestic demand is
      gloomier, Oxford Economics reports. The unemployment                   steady, but external weakness and uncertainty are likely to weigh on growth. Capital
      rate is still low, wages are rising, and moderate inflation is         Economics expects fiscal policy to be tighter in 2020, with the government budget
      boosting households’ real incomes. Consumers appear to                 deficit set to fall to 2.7% of GDP from 3.2% in 2019.
      be adopting a more cautious attitude to spending, with
      rising saving rates.

                                                                                       OFFICE
                                                                             In Paris we believe office occupier focus will be on areas where public transportation
                OFFICE                                                       is planned to improve in coming years. Demand should remain sustained by strong
      Investor demand for the office sector remains very strong,             office employment growth in 2020, Oxford Economics reports. Although PMA
      with prime yield compression in multiple locations.                    expects that new supply is likely to lead to an overall increase in vacancy in 2020,
      Rental growth is evident in the Helsinki CBD due to high               availability in core submarkets remains tight, except in La Défense.
      demand and still limited supply. PMA forecasts further
      yield compression, which – along with stronger rental                  We prefer areas such as the Southern and Southwestern suburbs with new
      growth in the near term – means Helsinki has a rather                  underground access (Métro Line 15) and the Western Business District, where prime
      positive outlook.                                                      rents are likely to remain stable, or even potentially rise slightly, in 2020. Prime rents
                                                                             in the CBD could undergo a modest correction as they are comparatively high. Lyon
      We prefer modern buildings in well-connected areas.                    is our second choice due to good occupier demand and a low vacancy rate (below
      Since limited supply in the traditional Helsinki CBD has led           6%, according to PMA).
      to a stretching of the borders of the CBD, there could be
      opportunities for rental growth in the fringe-of-CBD.                  We expect the French office investment market to remain strong in 2020, which
                                                                             might lead to further yield compression for prime properties.

                  LOGISTICS
                                                                                          LOGISTICS
      The fundamentals underpinning the logistics sector
      are positive. Occupier demand should improve going                     Our top picks are along the major French logistics corridors, particularly Paris, Lyon
      forwards, and new supply is limited. Demand is very                    and Marseille. We think demand will remain healthy and diversified at the regional
      strong for prime products, and there is a growing                      level in 2020. However, we only expect moderate prime rental growth as agents
      polarisation between such facilities in good locations                 report a lack of Grade A product and limited available land. We also favour some
      and outdated stock in less-desirable ones.                             locations outside of the main corridor, such as Toulouse, Bordeaux and Nantes,
                                                                             which are showing sustained rental activity and high build-to-suit completions.
      We prefer modern, high quality distribution centres
      along the main Finnish transport corridors and urban                   We expect the logistics investment market to remain strong in 2020, therefore there
      warehouses around Helsinki, due to robust fundamentals.                is room for further yield compression.

               RETAIL                                                                 RETAIL

      Occupier demand is stable, with a focus on prime                       E-commerce growth and changes in consumer behaviour are impacting on occupier
      locations and, particularly, retail combined with other                demand. Agents report that the development pipeline is contained due
      services, such as food and beverage as well as beauty or               to restrictive planning laws. Given the high uncertainty in the sector, we believe
      well-being, according to C&W. International retailers not              prime high street units and prime out-of-town assets are unlikely to see rental
      yet present in the Finnish market are looking for prime                growth in 2020. We prefer good assets in prime areas and we think retailers
      locations. There has been a strong influx of new supply,               should be very selective on secondary locations.
      meaning even prime rents could come under pressure in                  The retail investment market in 2019 is likely to have been quieter than in 2018,
      upcoming years. Prime products should remain in high                   and we believe things will not change much in 2020; therefore, prime yields
      demand among investors, while the outlook is more                      should remain at similar levels.
      uncertain for other segments.
OUTLOOK 2020
 28                                                                                                                                                                                                  29
                                                                                                                                                                                     savillsim.com

GERMANY
Country analysts: Matthias Düsing & Andreas Trumpp
                                                                                              IRELAND
                                                                                              Country analyst: Hamish Smith

               ECONOMY                                                                                       ECONOMY
      Germany’s export-orientated economy is exposed to further headwinds and                       Like the wider Eurozone region, Oxford Economics expects the Irish
      deteriorating business sentiment as global trade falters and technological adaptation         economy to slow but to remain one of Europe's fastest growing
      pressure in the manufacturing sector mounts. On the upside, robust labour market              economies. While a no-deal Brexit is a risk for the Irish economy,
      fundamentals are keeping domestic demand firm, although GDP growth slumped in                 the chance of this outcome appears to be receding.
      2019. Consensus Economics predicts GDP growth to be close to 0.5% for the year
      overall and does not expect a dramatic improvement in 2020: growth of 0.8% with a
      possible spillover of the current industrial downbeat into the service sector.
                                                                                                             OFFICE
                                                                                                    The Dublin office market has been characterised by strong occupier
                                                                                                    demand, particularly from the tech sector. Coupled with a lack of new
               OFFICE                                                                               development, this has put downwards pressure on vacancy.
      Excess demand in Germany’s top seven markets (Berlin, Cologne, Düsseldorf,
                                                                                                    However, the market appears close to a turning point. Completions
      Frankfurt, Hamburg, Munich, and Stuttgart) is poised to endure. Healthy occupier
                                                                                                    are set to rise sharply over the next couple of years, although Savills
      demand is stemming from positive office employment growth, the expanding tech
                                                                                                    Research notes that net additions will be lower due to demolitions and
      sector and corporate consolidations. Savills Research expects average vacancy rates
                                                                                                    withdrawals from the market.
      to stay at the low level of around 3% in the top seven, and even lower in the CBDs.
      Combined with restrained construction activity, rental growth is accelerating. Prime          But with occupier demand likely to slow on account of weaker economic
      yields are well below the 3% mark, and likely to compress further.                            activity, vacancy is likely to start edging higher. While this might not put
                                                                                                    immediate pressure on rental values, we think there is an increasing risk
      We favour multi-let core/core-plus assets in the CBDs of the top seven markets,
                                                                                                    that rents could come under some pressure over the next few years. As
      well-connected fringe-of-CBD locations with asset management and rent reversion
                                                                                                    a result, even with Dublin office yields among the highest in Europe, we
      potential as well as prime assets in major German provincials.
                                                                                                    remain cautious about the prospects for the sector.

                  LOGISTICS
                                                                                                                LOGISTICS
      The German logistics sector remains investors’ darling. Occupier demand is still
                                                                                                    Dublin’s industrial and logistics sector continues to benefit from strong
      robust given its underlying sector diversity. Scarcity of development plots,
                                                                                                    demand and a lack of available Grade A space, C&W reports. While
      restrictive zoning, planning and construction sector capacity constraints are
                                                                                                    occupier demand is likely to slow, the demand-supply imbalance for
      keeping the supply side on the brake, fuelling product scarcity and capital value
                                                                                                    good quality space seems unlikely to dissipate in the near-term. This
      growth. Although the share of speculative development is picking up slightly, the
                                                                                                    bodes well for further rental growth prospects.
      foreseeable pipeline is largely pre-let. Backed by market size and high liquidity,
      investor confidence remains high. Prime yields are at 3.80%, with further downwards           With yields around 5%, industrial and logistics assets around Dublin’s
      potential, according to BNPPRE.                                                               M50 ring road and main arterial routes remain interesting prospects.
      Core and core-plus assets with strong covenants in well-connected, established
      locations and second-tier markets with an interregional function remain our focus.
                                                                                                            RETAIL
                                                                                                    Ireland’s strong labour market and a steady pick-up in wage growth
              RETAIL                                                                                have supported the retail sector. However, consumer confidence
                                                                                                    fell sharply in 2019, to below the long-term average. While Brexit
      In spite of wage inflation, low saving rates and positive domestic demand outlooks,
                                                                                                    uncertainty might explain some of this decline, lower confidence is likely
      structural drivers and weakening consumer sentiment are putting high pressure on
                                                                                                    to be a headwind for the retail sector. A number of retailers continue to
      occupiers and landlords to adapt. New lease models necessitate increasing asset
                                                                                                    be active in the market, although there is also considerable noise from
      management activities. High street assets and shopping centres, which attune to
                                                                                                    other retailers looking at ways to reduce store numbers and achieve a
      these challenges by creating mixed-used destinations with food and beverage as
                                                                                                    leaner cost base, according to C&W.
      well as consumer goods anchoring, will remain competitive.
                                                                                                    One area performing well is retail parks, according to Savills Research,
      We maintain our positive view on food-anchored retail parks and supermarkets in
                                                                                                    supported by residential development. With house price growth slowing
      dominant locations to secure stable income streams. We also remain positive on
                                                                                                    to more sustainable rates, according to Capital Economics, retail parks
      high street assets in the top seven and major provincials with competitive formats
                                                                                                    located close to large catchments and with limited nearby competition
      and sustainable rental levels.
                                                                                                    could offer potential investment opportunities.
OUTLOOK 2020
 30                                                                                                                                                                             31
                                                                                                                                                                savillsim.com

ITALY
Country analyst: Matteo Vaglio Gralin
                                                                                                 LUXEMBOURG
                                                                                                 Country analyst: Judith Fischer

                ECONOMY                                                                                          ECONOMY
       Oxford Economics predicts that the Italian economy will grow by just 0.3% in                    Luxembourg’s economy will likely grow by 2.8%
       2020, having almost stagnated in 2019. A new pro-European Italian government                    in 2020, Oxford Economics projects, outpacing
       was formed last September and needs to push for more fiscal stimulus in order to                Eurozone growth notably. Due to the robust labour
       boost growth. Assuming that it does lift government spending, Oxford Economics                  market and rising wages, consumer spending
       expects the fiscal deficit to increase in 2020 but to remain within the 3% euro                 is likely to remain solid, but external risks are
       convergence threshold (Maastricht criteria).                                                    dampening the outlook for exports and investment.

                OFFICE                                                                                           OFFICE
       Milan is our top pick. We expect it to keep performing well in 2020, sustained by               After a robust office development pipeline
       strong fundamentals that are above the national average and comparable with                     throughout 2019, PMA expects office completions
       other main European cities. We think demand will remain driven by quality, image                in 2020 of 103,000 square metres (sq m), or 3.3%
       and flexibility. We anticipate that vacancy rates of the core submarkets will remain            of current stock. INOWAI Research expects office
       almost stable and prime rental growth to remain on a solid path in 2020, although               vacancy in Luxembourg to stabilise below 4%, with
       PMA reports rising completions. Rome is our second choice as PMA expects                        the CBD, Kirchberg and Station recording vacancy
       positive rental growth in 2020 (over 1%) and low new supply.
                                                                                                       rates below 2.5%.
       We also expect a dynamic office investment market and competition for assets to
                                                                                                       We like office buildings in the key markets as the
       keep yields at similar levels.
                                                                                                       supply-demand dynamics are supporting rental
                                                                                                       values. However, due to the small market size, there
                                                                                                       may be limited opportunities.
                   LOGISTICS
       We expect a slight upwards pressure on rents to continue in 2020 given the lack
       of quality space, while new high-quality completions should reduce the imbalance
       between demand and supply. We expect prime yield compression to continue in
       2020, as investor interest (both national and cross-border) is solid, particularly in
       northern Italy and the Rome area. Moreover, logistics yields look attractive when
       compared to other sectors.

               RETAIL
       We expect high street retail (especially the luxury segment) to perform well
       in 2020, particularly in large cities such as Milan, Venice, Florence and Rome,
       supported by strong tourist flows (over 62 million visitors to the country in 2018,
       the UN World Tourism Organization reports). Selective opportunities remain in the
       out-of-town segment for the best assets in prime catchments. The supermarket
       sector is also attractive given the large size of the grocery market. According to
       Euromonitor International, Italy was the fourth largest market (by retail value) in
       Europe in 2018.

                 ALTERNATIVES
       We like student housing. Demand is consistent and increasing, while the market
       is highly undersupplied. We also like retirement housing due to favourable
       demographic trends (a high percentage of the population is over 75 years old,
       Oxford Economics reports) and a lack of assets. Hotels are also appealing as there
       are opportunities to exploit a consolidation of current operators. These segments
       offer stable income, low return volatility and good portfolio diversification, which is
       attractive to investors.
You can also read