During Q1 2021, revisions to the economic outlook diverged for the Eurozone and the UK. The UK has experienced a severely restricted winter but with infection rates dropping during spring, an advanced vaccine rollout and the economy gradually re-opening, the growth outlook reached a better position. The Eurozone, on the other hand, was facing a third wave of infections with associated restrictions and a slower vaccine rollout which resulted in a downgrade to the growth prospects for 2021. Nonetheless, both the Eurozone and UK are expecting growth in 2021, at 3.8% and 4.8%, respectively.
The latest quarterly data shows a re-emergence of prime rental growth for the European office sector, the first quarter of growth since the start of the pandemic. In Q1 2021, prime headline rents increased by 0.3% versus -0.5% for the previous quarter. Some caution is needed here though as only a handful of markets registered growth with the vast majority recording no movement. The high street retail sector continues to suffer albeit the rate of decline slowed to -1.3% in Q1 down, from -2.9% in Q4. In contrast, the European logistics sector bounced back strongly last summer and continued that performance in Q1. Prime headline rents for Europe grew by 1.0% in Q1.
Looking ahead, European all sector prime rents are forecast to increase by 1.1% p.a. over the next five years, with logistics showing faster growth than office and retail.
Capital Markets Overview
Commercial property investment across Europe was almost one-third down in the first quarter of 2021 compared with the same period 12 months ago. A resurgent viral infection brought renewed lockdown restrictions in Europe, affecting many of the largest countries.
One of the most meaningful market dynamics through the first quarter was rising government bond yields. This is mostly due to concerns over rising inflation expectations, which led to a bond sell off, especially for longer dated bonds.
Despite the recent jump, bond yields remain at low levels on the back of ultra-loose monetary policy, supporting the relative attractiveness of real estate. Strong competition for office and logistics assets drove office and logistics yields down, while retail sector has seen yields correcting.
About the European Fair Value Index
The index was launched in August 2010 and covers 122 markets across Europe.
Fair value is the value at which an investor is indifferent between a risk-free return and the forecast return from holding property, taking into account the extra risk of investing in the property asset class.
When a property price is at fair value, an investor is being adequately compensated for the risk taken in choosing to purchase real estate; similarly, when the property price is below the fair value price, an investor is being more than compensated for the risk taken in choosing to purchase real estate. When buying at or below fair value, an investor does not necessarily buy at the bottom of the market.
Our fair value analysis focuses on prime assets and a five-year investment horizon and hold for the market overall; individual transactions may provide opportunities and risks beyond the average market view. In the report, we compare results for the current quarter with the previous quarter, which may differ from those published in the previous quarter’s report; this is due to the forward-looking methodology. As such, when our forecasts change so too does the Fair Value Index.