Commercial property market in Europe starts 2018 on a positive note

European commercial property markets have a positive momentum at the start of 2018 with provisional data for 2017 suggesting that investment volumes were higher than in 2016.

If 2017 beats 2016’s total of €216 billion it will still remain some way below the market peak of 2015 when over €250 billion was invested, according to the latest commercial property outlook report from Knight Frank.

The real estate firm expects 2018 transaction volumes to be similar to 2017 and the report says that significant amounts of capital continue to be allocated to real estate. It adds that an increasing prevalence of large scale platform and portfolio deals will help to support investment volumes

As the real estate cycle progresses, investors will increasingly need to look to rental growth, rather than continued yield compression, to drive returns, the report points out. Hotspots are likely to include markets where rental increases have been relatively slow to come through in the current cycle, particularly Amsterdam and Madrid, both of which are seeing rental growth gain momentum.

Although the German markets appear to be further ahead in the rental cycle, the fundamentals for growth such as high occupier demand, constrained supply and limited development are especially strong in Berlin and Munich.

The report also points out that flexible workspace and co-working is now a phenomenon in the marketplace. Technology, the growth in self-employment and evolving workforce demands are redefining the traditional workspace.

Indeed, the growing appetite for flexible offices is permeating across European markets, with London, Berlin and Paris witnessing the strongest growth. The sector will continue to expand, as new styles of workspaces are developed to service a growing variety of occupier needs, says Knight Frank.

It also says that the European logistics sector has significant investment appeal due to its relatively high yields, income producing qualities and the impact of the booming e-commerce sector. Online retailing is causing structural changes to demand, particularly by generating an increased need for urban logistics centres used for last mile delivery. Combined with the current scarcity of logistics property in cities, this has created an attractive supply and demand dynamic for both investors and developers.

The market will be helped by economic growth. The report explains that the Eurozone economy performed above expectations in 2017, with the International Monetary Fund forecasting that GDP growth for the year will be 2.1%, its highest level in a decade.

Although Eurozone growth may ease slightly in 2018, the consensus is that it will remain close to 2% and the strong European economic recovery has come despite a backdrop of political uncertainty, with France and Germany both holding dramatic elections in 2017.

But the report says there is potential political issues in a number of countries. A Government has not yet been formed following September’s German elections and, should coalition talks fail in January, fresh elections may be called. The European political agenda for 2018 also includes general elections in Italy in March and Sweden in September.

Meanwhile, the progress of the Catalan independence movement will be monitored closely, and uncertainty in the Barcelona property market may cause investors and occupiers to increasingly gravitate to Madrid as a relative safe haven.

Despite improving economic growth, the European Central Bank is expected to keep interest rates on hold at their current record lows until 2019. Government bond yields are likely to edge upwards during 2018, but the margins to property yields should remain attractive.

There is the potential for further moderate prime yield compression in select European markets in 2018, but a general stabilisation of yields is anticipated by the end of the year and interest rate rises may start to put upward pressure on prime yields from 2019, the report concludes.