Positive expectations for the economy will push demand for business property in 2018, and a shortage of high-quality office space will force companies to pre-plan office requirements and wait for the completion of new projects.
Depending on the outcome of the Brexit talks, a number of companies may move some or all of their operations from London to mainland Europe and this will increase the demand for office space in cities like Paris, Frankfurt, Dublin and Amsterdam. Experts expect the limited supply of quality office space to the most desirable locations to remain an obstacle to tenants.
According to projections, in 2018 completed office buildings in its countries will increase by 17% on an annual basis and by 18% in 2019, with almost 40% of these areas already hired. This is expected to gradually reduce tensions between supply and demand.
In the retail sector, retailers will continue to focus on the best shopping streets and shopping centers. Moreover, as 90% of retail sales will be made in physical stores in Europe, more and more online marketers will expand their physical space.
Central locations in cities with a large influx of tourists, densely populated urban areas, and well-located regional destinations can be attractive to the different types of retailers' concepts. At the same time, the decline in commercial areas in secondary and third-party locations will continue and they will have to be used for alternative purposes.
At the same time, e-commerce in Europe is growing strongly, especially in southern countries. Estimates indicate that by the end of 2017, e-commerce on the Old Continent is worth about $ 602 billion, up 14% on an annual basis. For this year, Savills expects an increase of 14%. The company predicts more mergers and acquisitions in the sector because of the interest in a larger presence in large economies and the drive of some big regional online stores to enter into growing markets.
Demand for warehouses will remain strong in the most highly developed e-commerce markets, such as the UK, France, Germany, the Netherlands and Sweden, as well as in emerging markets such as Spain and Italy.
The areas for collaboration, joint life, multifunctional and shared spaces are some of the growing sub-sectors, driven by the changing needs of tenants. Savills predicts that the popularity of these emerging sectors will continue this year, which will force the industry to adapt to the new reality. The cities in which these trends are more pronounced are centers of innovation such as London, Paris, Amsterdam, Berlin, Frankfurt, Barcelona, Copenhagen, Stockholm and Dublin.
More cautious investments in 2018
In 2018 both investors and lenders are likely to take a cautious approach and focus on quality assets in the region, mainly in markets with strong fundamentals such as Germany, France, the Netherlands, Spain and the Scandinavian countries. However, competition may push some players beyond the largest and most liquid markets.
Markets on the periphery, which will achieve better than the average in Europe, such as Central and Eastern Europe, can attract more investors ready to climb up the yield curve, Savills predicts.
Asian investments in Europe reached 23.2 billion euros at the end of the third quarter of 2017, an increase of 57% on an annual basis. Volume volumes in the fourth quarter are likely to reach approximately 18 billion euros, and the total volume of the year - a record 41.2 billion euros - awaits Savills.
Despite forecasts of a possible decline in Chinese investment due to restrictions on capital outflows from mainland China, those in Hong Kong are not affected, analysts write. They expect the nature of Chinese investments to change from trophy assets to long-term corporate investment such as logistics space, student housing, and medical facilities. In addition, Korean and Singaporean investors continue to look for qualitative assets in Europe, which is why Savills expects Asian investments in the region to grow further.
In 2017, profitability recorded a record decline in all European markets, especially in the premium segment. But as the near-zero interest rates are nearing its end, it can be expected that the end of the significant capital gains will also come to an end.
Analysts expect real estate yields to stabilize this year and remain at historically low levels for a while as private and institutional money will continue to compete for quality assets. The low yield of first-class land will also be driven by a positive growth in rents.
Office space changes
The share of office space investment has remained close to 40%. Investors will remain confident in the office property sector, as demand from tenants is expected to grow. At the same time, Europe's average vacancy rate is at a record low of 7.5%, with almost no first class office space in Berlin, London, Munich and Stockholm.
Investors should keep in mind that new ways of working and technological change will also lead to changes in office space. Tenants want ever shorter and more flexible rents and more flexible spaces, which creates the need for a clever approach to asset management.
In addition, the share of retail space in total investment declines from 21% in recent years to 18% in 2017. This trend may also remain in 2018 as investors are worried about the impact of e-commerce on the sector.
At the same time, after the peak of 2015, the market is depleted by first-rate retail space, and investors are reluctant to take greater risks in this segment. In 2018, they will continue to look for first-class rental opportunities and focus on the best shopping streets and shopping centers.
Despite strong fundamentals supporting retail sales, rising consumer spending, declining unemployment and increasing tourists' numbers, capital gains and rents are unlikely to increase.
Logistics areas are the winners of the growth of e-commerce as it strengthens the demand for regional logistics hubs and smaller warehouses near urban centers. The share of the sector in total investment has increased from 8% in recent years to around 13% in 2017 and can be expected to increase further.