This development could have been expected with regards to Brexit, tensions in Chinese-American relations and the declining performance of the German economy. Central banks are supporting growth by lowering rates. However, investors (even in real estate) tend seek long-term stability and security of investments. What can be expected going forward? This is indicated by the half-year forecast of BNP Paribas Real Estate.
Currently, the yields of a large part of government bond stock are in negative territory, and we do not expect it to rise in the short to medium term. The low rate environment is affecting the European real estate market by dragging down property yields to historic lows.
The volume of investment transactions is a key indicator for the real estate market. The first half-year shows a year-on-year decline of around 5% in the 18 EU countries under review.
At the end of the year, we estimate it to be 12% less than in 2017, but only slightly below the five-year average. However, there will be more marked differences between specific countries and cities. French markets will see a strong rise. Prague, Warsaw and Barcelona are attractive to investors seeking new territories with higher yields. On the other hand, Germany and especially Great Britain expect a decline in real estate investments.
Offices remain the most traded asset on the European real estate market. We expect a continuing decline in the availability of office space in most markets. The low level of speculative construction and supply, alongside persisting demand, strengthen investor confidence, and this is also reflected in the compression of yield rates. This year, we continue to expect yield compress in markets with rental growth, which is the majority of Germany and France's largest office markets, as well as the CEE region including Prague. According to the predictions of BNP Paribas Real Estate, office yields should gradually stabilise this year.
Yield compression (due to high investor interest and the 'increase' in prices) can be seen also in the secondary market for buildings with good potential to increase value through active management, releasing or reconstruction.
Logistics real estate should also record yield compression this year, most notably in France by up to 75 bps. The logistics segment profits greatly from the booming e-commerce. The majority of construction is built-to-suit due to the specific requirements of tenants in this sector, and hence the vacancy rate of modern warehouses remains low. Moreover, in some countries the rent will grow due to lack of development land (it is not just specific to the Czech Republic alone). The warehouse and industrial space segment is negatively impacted by the fall in demand for cars, which affects mainly the automotive industry of the export-oriented countries of the CEE region.
The retail segment is less predictable. High demand remains for premises in brick and mortar stores on prime high streets and top locations. Nevertheless, two factors that may affect the sector in the near future should be mentioned. The first is restrictive measures by some municipalities against excessive tourism. We see it in Barcelona, Berlin and Venice. Fewer tourists mean lower sales and, potentially, lower rental income.
Much more fundamental is the transformation of European consumer behaviour. People moved en masse to e-shops and are increasingly making purchases online. European shopping centres and retail parks cope less well with the changes in this respect than the high street shops. Retail owners and managers aim to introduce new formats improving the shopping experience and strengthening the food & beverage segment, things that can't be purchased on the Internet.
In summary, we see more objective macroeconomic risks stemming from a more explosive international situation. The deceleration of the German economy, which is in danger of falling into recession, is essential for the development of strongly export-oriented countries in the CEE region. Negative impacts are softened by strong domestic demand, which is driving economic growth, not only in the Czech Republic, thanks to low unemployment and increasing wages.
In terms of real estate investment, the main challenge will be how to cope with low yields in a low interest rate environment. In the future, it will no longer be possible to count on a significant yield compression, which means lower capital appreciation, total return will be largely Income driven. Investors will therefore have to work intensively with real estate, increase occupancy and increase rental income to generate and increase value of their investments.
