by Virginie Wallut, Director of Real Estate Research and Sustainable Investing, La Française Real Estate Managers
Snapshot of European real estate investment market
Q1 2021 activity in the European real estate market, regardless of travel restrictions and sanitary measures, maintained a certain dynamic. In Q1 2021, the volume of corporate real estate investments amounted to €40 billion in Europe (€10 billion in the United Kingdom, €9 billion in Germany, €5 billion in France and €2 billion in Benelux). Though this represents a decline of 40% compared to Q1 2020, the level of investments remains satisfactory given the exceptional volume recorded in Q1 2020. (Source: CBRE)
Investment volumes vary drastically depending on asset class. Demand for logistics real estate was confirmed and investors showed renewed interest in offices. However, the tourism and retail sectors continue to be largely impacted by the health crisis despite the high demand for diversification assets.
During S2 2021, we anticipate that investors will continue to favor more liquid markets, namely Germany, France and the UK. However, we are witnessing a situation similar to 2009, meaning that today’s real estate market is a “local investor” market, and the number of cross-border transactions has declined significantly. (Source: CBRE) Perhaps, this too will evolve as travel restrictions are progressively lifted and the vaccination roll-out gains in traction.
Prime Office yields in Europe
The health crisis has naturally accelerated the flight to quality. In the low-for-long interest rate environment, demand for core assets is keeping prime real estate yields under pressure. Since the start of the pandemic, office yields have remained broadly stable for prime assets, i.e., Paris and the main German cities show prime yields below 3%. (Source: CBRE) We can expect a greater disparity between prime and secondary office market yields as we move further into 2021.
The prospect of an upturn in the economic activity of tenants is pushing some investors to position themselves on riskier assets with more opportunistic strategies. However, this type of strategy must take into consideration new work habits and user demand for sustainable and flexible buildings, with an emphasis on safety and new health directives and well-being.
Investment activity should pick up in the coming months, especially if the rebound in rental markets is confirmed. Investors may position themselves on lower yielding assets in the short-term in anticipation of economic recovery.
In Europe, take-up was down 23% year-on-year (Q1 2021 vs Q1 2020). However, take-up varies significantly depending on the fundamentals of the market. In Q1 2021, the Hague, Brussels and Berlin have shown an increase of more than 50% compared to Q1 2020, whereas Dublin, Amsterdam and La Défense have shown a decline of more than 50%. (Source: CBRE)
European markets were subject to increased vacancy rates. Despite the gradual lifting of Covid restrictions in Q2, this trend should continue due to the completion of projects initiated before the crisis. In one year, supply increased by 30% in Europe. In Q1 2021, in central locations, especially in Germany, the increase in supply remained limited with vacancy rates below 5%. (Source: CBRE)
The rental values of prime locations remained broadly stable since the start of the health crisis. However, markets, where current or future supply is abundant, such as Madrid or Dublin, have recorded headline rent corrections. In Q1, prime rents appear to have landed in the UK after four quarters of continuous decline. Peripheral location rental values experienced downward pressure given abundant supply. In all markets, lease (existing and new) incentives are common.
Sources: CBRE, La Française REM Research