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