Our Outlooks: What Direction is Europe’s Commercial Real Estate Taking?

As Fed is likely to proceed to only one rate hike this year, the accommodative monetary policy in Continental Europe and Japan is to be pursued. So the lasting low long-term sovereign bond yields (and mortgage rates) will provide a longer-than-expected opportunity for property investors to (re)finance assets. This also explains why we do not expect any imminent spike in gross prime yields. They are likely to oscillate around the current low levels for a longer period, limiting not only the risk of potential capital losses but at the same time the potential for significant capital growth.
 

Will low interest rates benefit commercial real estate markets?
 

We believe the outlook is still positive, even though return expectations from investors should not be too ambitious. Not only are a number of European occupier markets such as Spain and Portugal clearly recovering, yet more “established” CRE markets are in a position to better perform as well in the near future. The Netherlands, Germany (in particular Berlin and various regional cities) and Central Europe are good examples. London is very expensive; yet this city clearly illustrates that capital performance is not only driven by the weight of international investment money but equally on better occupier fundamentals, for instance lower vacancy rates and growth in office rental values.

This trend is less obvious in Paris. We also believe that long-term nominal interest rates are likely to continue to fuel investors’ confidence. Even in markets with rather weak growth potential (for example the Brussels office market), the very low interest rates will probably keep the cost of borrowing very attractive.
 

Will investors continue to massively invest outside their domestic respective markets?

Although investors have plenty of capital to deploy, the “stress” of money in itself can never be the only reason to keep confidence in property investments (and other investments). Investors still need to be willing to use the cash … There are early signs that transaction volumes are slowing, and it remains to be seen whether investors – in particular from the emerging markets such as China, Russia, the Middle East and Brazil – will continue to massively invest outside their domestic respective markets.

Also, direct real estate investments are certainly less volatile than the more traditional asset classes in times of financial turmoil. Real estate – on the condition that investors are not overleveraged – offers protection against volatility. However, any (new) turmoil with a magnitude like last January’s cannot last for too long as this would either weaken investors’ confidence or the occupier markets themselves (higher unemployment rates in the financial centres, weakening consumption pattern, etc.).
 

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