Confidence is key — especially when it comes to assessing investor sentiment towards commercial real estate markets. Despite speculation that markets are due for a course correction and concerns over political instability, European investors nevertheless continue to feel a sense of cautious optimism. As a tumultuous decade draws closer to an end, these investors continue to make prime investments in commercial real estate throughout the region to maintain a sense of stability, while pursuing new opportunities brought forth by evolving lifestyle trends such as flexible office spaces.
As we head into 2020, below are some of the strongest visible trends throughout the European commercial real estate market:
A Search for Stable, Secure Investments
Most of Europe’s major markets have recovered from the 2008 to 2009 economic downturn, leaving a relatively well-balanced level of supply and demand for commercial properties. However, according to a recent PwC report, many investors are approaching the European real estate market as a means of capital preservation as Europe’s late-cycle market expresses concerns over high real estate values and asset scarcity. Opting for security over outsized profits, investments producing secure and stable returns are in high demand to ward off the potential risks of another market downturn or unexpected geopolitical shock.
Migration Towards Alternative and Niche Properties
Prime offices situated in central business districts remain incredibly popular with investors, exhibiting all-time low vacancies and rising rents. Due to high levels of competition for prime assets, investors seeking higher returns are turning towards niche and emerging real estate sectors for high-growth opportunities. For example, new and evolving property types — such as co-working, co-living and retirement communities — are becoming more embedded in society through structural changes by which people live and work. As these alternatives become the new mainstream, investors are expected to continue flocking towards micro apartments, flexible offices, student housing, and even hotels in the pursuit of growth and high returns.
Interest Rates Ready to Rise
While the overall market may seem due for an overcorrection after this decade of recovery and growth, real estate cycles are not necessarily fixed or suggesting a pending downturn. However, one notable risk for commercial real estate investors is the likelihood of interest rates to rise by the end of 2020. A report from Savills Research anticipates the Bank of England and European Central Bank to raise base rates to nearly two percent and refinancing rates to one percent, which could give investors pause before making any major moves to avoid nervousness associated with high interest rates.
The biggest question for commercial real estate investors is “what’s going to happen in the United Kingdom (UK)?” With no clear resolution to the ongoing Brexit saga in sight, investors are left holding their breath as to whether it will result in a deal with the European Union or a brash exit. Regardless of the outcome, an overall decline of UK real estate investment is predicted to occur. Analysis from PwC finds that some European investment managers noted that their institutional investors see the UK as being “fraught with risk.” In a period in which investors are seeking stability, the UK remains a gamble for investment opportunities and, as a result, businesses are relocating from Britain to other major cities in continental Europe. For example, major cities like Frankfurt and Paris are now absorbing what was much of London’s financial edge.
European Commercial Real Estate in 2020 and Beyond
Commercial real estate investors have a clear rationale for cautious optimism. While the state of Brexit remains pending, the situation nevertheless creates new opportunities for businesses across continental Europe. Prime real estate in major city centers continues to hold steady and strong, and as investors may seek to depart from the UK and find new opportunities for growth, alternative and niche properties offer interesting and lucrative possibilities to fit their demands. However, with the potential for interest rates to rise and for global politics to become more uncertain, investors seeking opportunities are hedging their bets against insecurity and instability.