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EMEA Property Values EMEA Property Values

Where Do European Property Values Go from Here?

Scenarios & Implications for Commercial Real Estate (CRE)

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The economic outlook for the euro area has turned more dismal with downside risks increasing.

Signs of the market reacting to a changing economic outlook and elevated levels of uncertainty are beginning to emerge. Uncertainty surrounding inflation, persistent labor shortages, Russian invasion of Ukraine, and the risk of an ECB Policy error are some of the challenges investors are having to navigate. 

To help you think through the implications of the shifting macro environment, we modeled how property values across sectors will perform under four unique economic scenarios across Europe*

*For all variables except NOI, we have used the European aggregate from the MSCI quarterly Index dataset, removing currency volatility, reflecting the wider (average) market. Note: Scenario probabilities do not add to 100% because there are a variety of other scenarios that could unfold outside of the four presented in this report. 

Five Key Questions

Economic indicators all point to weakness, with the chances of a recession in the euro area rising. In our baseline scenario, Cushman & Wakefield now assumes a mild recession beginning in Q4 2022 with three-quarters of negative growth, before returning to moderate growth in the second half of next year.

Although a recession looks inevitable it is likely to be ‘relatively mild’ largely due to the resilient labour market and the anticipated fiscal measures. Moreover, healthy corporate and bank balance sheets will help contain widespread job losses which is why we don’t expect a profound hit to activity and employment. However, as the region remains highly vulnerable to disruptions in oil and gas markets the risks are skewed to the downside.

In our baseline scenario (mild recession), we estimate all property values will decline by approximately 18% next year, ranging from 10% to 20% depending on the product type.

Market volatility creates opportunity. Now is precisely the time to revisit real estate portfolio strategies to diversify and maximise returns. We offer investment themes towards the end of the report.

Government bond yields have moved significantly higher in 2022, from hovering just above 0% to the mid-2% range. Given the historical relationship between bonds and real estate (which typically move in tandem), we assume that yields will eventually follow government bond yields higher to bring the spread back into a range that is more consistent with the historic norm. As NOI growth slows due to the recession, this will place downward pressure on property values.


Four Scenarios Featured in the Report

   01/ Soft Landing | 30% probability: Under this scenario, economic growth slows but a recession is avoided. Bond yields stabilise near their current levels.  
     
  02/ Upside Growth | 5% probability: Virtually all risk factors quickly abate, allowing growth to reaccelerate.  
     
  03/ Mild Recession | 50% probability: Persistent inflationary pressures push the ECB to raise rates aggressively, stalling business investment and consumer spending. The Euro area economy enters a mild recession beginning in Q4 2022 with three-quarters of negative growth, before returning to moderate growth in the second half of next year.
     

04/ Stagflation | 5% probability: The ECB fails to curb inflation, which accelerates amid slower economic growth and rising unemployment. A severe recession begins in 2024.
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For each scenario, we model and present forecasted values for the following: net operating income (NOI), yields, total returns, and thus property values for the office, industrial and retail sectors.


Impact on Property Values

 

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