#Real Estate — 18.06.2019

Will The Current Property Cycles In Europe Continue?

Pol Robert Tansens

BNP Paribas

The positive momentum for commercial real-estate investments in Europe continued in 2018, with an investment volume of EUR 264bn in 2018 for all commercial property segments combined, only 2% below 2017, which was a record year.


“On the back of a stable occupier market, European commercial real estate enters 2019 with some of the strongest fundamentals ever seen on the continent.” (source: BNP Paribas Real Estate, At a glance: European Property Prospects – February 2019).

According to BNP Paribas Real Estate, gross initial prime yields (GIYs) in some core markets stand at a historically low level, so there is little room for further compression, bar the logistics sector.


Let’s take the European office market as an example. “For 70% of the office markets that we cover in our report, prime yields will remain stable in 2019. We do see potential for property yields to start unwinding from mid-2020 coinciding with resurgence in core inflation and thus monetary policy tightening. Even so we think the increase will be gradual, with the cumulative average rise in yields over the 5-year forecast period expected to be +50bps for offices and +35bps for logistics.” (source: At a glance: European Property Prospects – February 2019).


Forecasts for office rental growth in Europe range from virtually non-existent, to around 8% this year. Berlin is expected to enjoy the strongest growth in office rents of 8%. Even though Spanish cities have already experienced sharp growth, they still have some potential with expected average annual growth exceeding 2% over 5 years. French office markets are projected to generate stable or slightly higher rents, while London’s could decline initially due to Brexit.

As we wrote in our previous property report published in October 2018, capital appreciation returns are set to slow further. Values of tier-1 offices cannot go up much higher, because GIYs would be ridiculously tight. As a result, total returns booked by first-grade offices—after adding net rental income—are expected to be in the single digits for most office markets in 2019. One exception is Berlin (+11%), a market supported by an expected growth in rents, despite carrying the lowest real-estate yield in Europe (2.7%).


Prime total returns across the 36 European markets that BNP Paribas Real Estate covers may average +4% in 2019. The best returns are expected in Madrid (+8%), Amsterdam (+9%) and the German cities of Cologne (+9%), Dusseldorf (+8%) and Frankfurt (+7.5%).


“In contrast to the prime segment, the broader market (including secondary assets) will have a higher level of return. The total return here will average +6.75% in 2019. There are only three markets: Berlin (+16%), Marseille (+11%) and Amsterdam (+10%) with double-digit returns. A large part of this is due to the higher yield, providing a higher income return relative to the prime segment. In the case of Berlin, again the expected strong rental upswing is supporting higher capital growth.” (source: BNP Paribas Real Estate, February 2019).


How did European debt pricing look at the end of 2018? Senior debt contracted in first-class European offices and the loan-to-value ratio (LTV) was below 65% in many markets. Borrowing costs for commercial real estate generally decreased in 2018, due to lower swap rates and margins. "From the lenders' point of view, risk undoubtedly increased in 2018; yields decreased, underlying values increased and key risk measures appear to be tight in some markets, with costs generally below 2.5% and very often below 1.5% all-inclusive." (source: CBRE, European debt, 2018 in review, Outlook for 2019, March 2019). For borrowers, lower debt costs mean that there are many markets which offer them the required IRRs.