Savills : Six questions for European real estate this year

With 2021 now underway, here are six questions and answers that we expect to impact European real estate this year.

Who will drive the investment market?

European investors are expected to continue to be very active in 2021, with last year seeing, amongst others, Union Investment acquiring the Neue Balan campus in Munich for over €100 million and Heimstaden buying 2,000 residential units in the Netherlands for €375 million, with Savills advising on both transactions.

Core money will be targeting best in class product so core yields should continue to move in, while secondary yields will soften. In the second half of 2021, some investors may start moving up the risk curve.

What are the non-core opportunities?

Repriced secondary offices and retail could be non-core opportunities. Others are redeveloped offices, logistics and multifamily assets in locations with strong fundamentals, as well as retrofitting buildings to increase their green credentials.

Over the next few months we should start to see owners gradually becoming more realistic about their holdings. As pricing becomes more transparent, this should encourage more sellers to bring assets to the market, unlocking liquidity.

What will happen to office vacancy rates?

Office vacancy rates are not expected to rise significantly in core markets this year across Europe as they were at record low levels for many markets going into the pandemic and still only stand at 6.3 per cent on average. Secondary, older stock in need of refurbishment will suffer more, and we may see more repurposing.

How low can logistics yields go?

Availability of prime logistics assets in most core markets is limited and supply is controlled by a few large players. This could lead to positive rental growth and we expect further yield compression for prime logistics assets. The accelerated consumer shift towards online shopping during the pandemic (from 12 per cent in 2019 to over 16 per cent in 2020) has created a swift rise in warehousing requirements. Alibaba's planned expansion into the European market is likely to act as a further boost to demand.

Will disruption be the catalyst for change in retail?

Vacancies will rise, due to retailer failures, and rents will be under downward pressure. Average prime European shopping centre rents peaked in 2018 and have fallen over the past two years by 3 per cent per annum. As a result, 2021 could be the year when repricing for retail reaches a point where it begins to look interesting for buyers, whether for current use or repurposing.

Are the living sectors becoming core?

2021 will favour sectors with defensive characteristics such as multifamily, senior living and even student housing, which benefit from macro factors such as demographic shifts. For example, investment into Swedish and German care homes between January and September 2020 increased by 80 per cent and 21 per cent year on year respectively. The share of multifamily investment in 2020 (up to Q3) increased by 33 per cent yoy. The living sectors are expected to capture at least one fifth of market activity this year, making them the second largest sector after offices and the new core.

Further information

Contact Eri Mitsostergiou

Read more: European Property Themes 2021