Cushman and Wakefield predict that in 2015, property investment activity will significantly increase in Europe, the Middle East, and Africa (EMEA).
From an estimated €206 billion ($250 billion USD) this year, investment volumes in EMEA are expected to rise 20 percent the following year to €247 billion ($300 billion USD). Although the demand is already high, markets will be even more liquid in 2015 due to rising fund allocations, active job markets in many cities, and intensifying competition in the financial sector. Additionally, due to the relative yield and risk profile of real estate, short-term worries like stock market volatility, worries about deflation, and slow economic growth may all point to increased demand for real estate. Retail and logistics will continue to gain market share, but high-quality real estate will be in demand across all industries, and a noticeable increase in the appetite for development is to be expected, initially focusing on the region’s core office markets.
Additionally, Cushman & Wakefield notes:
Quantitative easing (QE), which will increase liquidity, and the fallout from the ECB bank stress tests, which both lift a market restraint from this year and open the door for more sales as banks take action, could create the conditions for noticeably stronger activity.
Profit-taking and some new development should help to increase the variety of investment opportunities on the market, along with the sale of loans and assets and deleveraging. While some investors are compelled to do this out of necessity to find opportunities, interest in a wider range of markets and sectors should also continue, and others are actively seeking to embrace more risk in search of greater returns. Therefore, a greater emphasis on core-plus and value-add opportunities is to be anticipated, even though demand at the core end of the market will continue to be very significant.
With volumes up an estimated 55% this year, southern markets, particularly Spain, have led the recovery. 2015 is expected to see a continuation of this, with a growth of 45–50%. Although the Nordics are expected to increase by 25% after increasing by 7% this year, other areas that were more overlooked in 2014 should experience stronger demand. This is because of their strong appeal as markets with low structural risk and good relative growth prospects. The CEE markets, which fell by 15-20% this year, are predicted to recover as well and rise by 30–35%. Events in Ukraine, as well as fluctuating commodity prices and general unpredictability in the emerging market, may be holding back Russia and some non-EU eastern markets. However, the short-term outlook for Central Europe is different and more promising, and where the right stock is available, other eastern EU markets may experience greater interest. While this is happening, we currently forecast growth in Western markets at 15%, a slight decrease from the 20% increase seen this year as a result of the fuller recovery these markets have already experienced.
Prices are expected to continue rising due to intense buyer competition, and prime yields are predicted to decrease by 25–50 bps over the course of the year, averaging 5.6% across all sectors in bigger cities.
Growth will be constrained by ongoing uncertainty, geopolitical risks, and deflation, but a slow, hesitant recovery is still going on, and 2015 should, on the whole, be a better year than 2014. One benefit of lower inflation and firmer labor markets is that they should increase purchasing power, which should increase domestic demand in the majority of Europe. The decline in the euro and lower input costs should also aid production. Additionally, it appears that the credit cycle has bottomed, as evidenced by rising bank lending and the expansion of the money supply.
Despite the short-term advantages deflation provides to consumers and producers, inflation will continue to decline as a result of falling energy prices, which will keep deflation in the spotlight. This ought to slow down the normalization of monetary policy and even lead to more easing in the Eurozone. Although there is a clear risk of a bubble given that investment markets are currently well ahead of occupier cycles, this won’t be apparent until after 2015.
Occupational trends are often supply-driven, but as a result of new technology and altered living, working, and shopping habits, needs are changing and will be a major factor driving demand across all European markets.
While businesses will continue to prioritize affordability due to low and erratic economic growth, the need for efficient space will start to drive up rents. Lower commodity prices may facilitate this process if build costs fall. Prime rents, driven by Western markets, are predicted to increase by 2-3% in 2015, with strong growth for major high streets and shopping malls, though offices may take the lead overall due to a lack of new supply. As e-commerce increases the importance of logistics, better than historical industrial performance is anticipated, but there is still a risk of secondary market underperformance across all sectors.
Europe will continue to draw a disproportionate amount of global investment thanks to improved supply and demand and more liquidity as a result of quantitative easing (QE), though this may grow at a slightly slower rate than in 2014 while domestic and regional spending will rise as fund allocations are increased. Compared to domestic spending, cross-border investment is expected to increase by 30% overall, up 30% to 35% globally and 20% locally.
Jan Willem Bastijn, head of EMEA Capital Markets for Cushman & Wakefield, stated that “as both the supply and demand outlook improves, our estimates for the market continue to be pushed higher. The push for demand is already clear, and the boost for supply will come from deleveraging banks and businesses as well as profit-taking and, in our opinion, a more noticeable pick-up in development. With volatile stock markets and rising liquidity boosted by quantitative easing.
“Our primary projection calls for a 20% increase to close to €250 billion, which could make 2015 the second-best year ever for volumes and only 8% below the pre-crisis peak. But given the level of liquidity, we’re currently experiencing, that could very well be surpassed, and by 2016 at the latest, the market will have reached a new record high.
“As other regions show stronger economic growth, investor risk tolerance continues to rise, and the unwinding of quantitative easing decreases global liquidity, it is anticipated that the focus on Europe that has been prevalent over the past one to two years will gradually lessen. Particularly regions of the USA and Asia are expected to draw more EMEA investment. However, in the short term, more QE in the Eurozone and a wider range of opportunities in Europe as banks and companies restructure and deleverage will keep the world’s attention on Europe for longer than anticipated.”
“The risks in today’s market are hard to judge – some in fact are hardly visible at present and others will bubble up, perhaps most notably in the political sphere this year,” says David Hutchings, Head of EMEA Investment Strategy at Cushman & Wakefield. As a result, for many investors, it’s all about the lease, and they need to make sure their strategy is as future-proof as possible. To do this, they should concentrate on real estate that meets occupier needs and is adaptable to change. Only the best properties will be in a position to weather an inflation or deflationary period.
“Investors also need to broaden their investment horizons in order to include new markets and new sectors, and 2015 should see a continued expansion into industries like multifamily housing and healthcare as formerly “alternative” sectors begin to enter the mainstream.
“Bond yields appear likely to remain low in 2015, putting additional pressure on property yields even though a bubble may develop in the future due to bond markets and excessive liquidity. Pricing will change to reflect the new market conditions, in which liquidity and income sustainability should be more highly rewarded than in the past. Markets with below-average income sustainability and security will be most vulnerable to the bubble risk.”