Fragmented, local markets with their individual dynamics characterize the real estate economy. Nevertheless, some common trends can be observed across Europe.
Most countries are either facing a slowdown or a contraction in GDP and short-term outlooks are not looking positive. Also the stronger countries have started to feel the effects of the financial crisis.
It is therefore no surprise that uncertainty regarding the economic development results in weaker demand for office space. Expansion plans have been put on hold and cost reduction or an increase in efficiency have become a priority. As a result, tenants who are relocating prefer to move to more flexible and modern space leaving behind the older inventory that comes under pressure. This leads to an increase of CBD vacancy in some areas and to a shift in demand towards new development zones. The absorption of large formats has become more difficult across the continent.
Secondary locations suffer from weak domestic demand for retail space and increasingly feel the competition from online distribution. Modern shopping centers with a comprehensive tenant mix show resistance to this development and prime locations are still very much sought after. Large national retailers and global brands push into the city centers with their high footfall to strengthen their presence at the consumer base. Rents for central locations are still on a record height and yields remain under pressure due to the scarcity of investment opportunities.
While the commercial markets have very much in common across Europe, the dynamics influencing residential property are diverging. The southern countries face economic challenges, high unemployment and loan constraints, which have a negative effect on investments. Due to limited stock, the major cities are less affected and have remained fairly stable. France, where prices have been booming for a decade, has had to experience a dramatic decline in residential property transactions. The change in the market trend has become obvious and price increases have come to a halt. With the exception of the Netherlands, the other European residential markets are either performing strongly or have remained at least stable. All the markets have one thing in common: higher priced residential property has started to see a weakening demand and should therefore be chosen very selectively as an investment opportunity.
The Real Winners
Although a summary across countries and cultures is hardly possible, there is one common trend that can be observed throughout Europe: demand from tenants and investments focus on the major cities. People move to where they find work, office space is required where qualified workforce can be found and retail space is most interesting where consumer footfall is high. This results in market liquidity and a relative, long-term stability. The resulting risk/return profile attracts global sources of capital at comparably low yield levels.
KPMG gives insight
KPMG publishes its European Real SnapShot on a regular basis. The Spring 2013 edition provides you with an actual overview and insight into the real estate markets across Europe.