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Think European cities 2020 outlook
Domestic political headwinds, most evident in the United Kingdom, Spain and Italy, plus the negative global trade environment will continue to weigh on eurozone sentiment and orders. This is likely to lead to a slowdown in business investment, which surprised on the upside in 2019.
On a more positive note, credit conditions remain supportive for investment, with loans to corporates still expanding at a robust pace. Activity in construction and real estate remains solid across many countries, supporting investment, although we expect their contribution to growth to moderate in 2020.
Subdued growth and inflation have pushed the European Central Bank (ECB) towards a more accommodative path than we saw in the spring, abandoning its earlier stated aim to normalise interest rates – a stance mirrored by other global central banks. The ECB have cut the deposit rate by 10bps to -0.50%, while pledging to hold interest rates “at their present or lower levels” until the inflation outlook converges to its target of close to, but just below, 2%. It also reactivated the asset purchase programme, at €20 billion a month, making the new QE programme open-ended. The Bank announced more favourable conditions for its targeted longer-term refinancing operations (TLTRO) and introduced a tiered reserves system for bank deposits to ease the impact of negative rates.
The weak growth outlook combined with the ECB’s strengthened forward guidance means that monetary conditions previously considered ‘temporary’ and ‘extraordinary’ will remain in place for an extended period. We do not expect interest rates to rise until 2022 at the earliest.
Against this backdrop, the negative benchmark government bond yields witnessed across core Europe, and just 0.4% for the United Kingdom, as of end Q3 2019, look set to linger in 2020 and beyond. With risk-free rates compressed at this super-low level for longer, real estate is set to benefit.
Office sector overview
- The eurozone economy slowed markedly over 2018, with leasing transactions in Paris, Munich, Amsterdam, Luxembourg, Vienna and to a lesser extent Stockholm c.30% lower by Q3 2019; Amsterdam take-up is 50% weaker.
- A number of centres continue to perform well; among these are Hamburg, Brussels, Berlin, Dusseldorf, Milan, Dublin, Rotterdam, Warsaw, Lisbon, Barcelona, Madrid and London City.
- Despite leasing transactions cooling from prior peaks, solid demand and disciplined development underpins a positive outlook for rental growth in most markets into 2020.
Retail sector overview
- Repricing has been far less marked in continental Europe than in the U.K., with prime shopping centre yields moving out 20bps in Germany and 25bps in Italy and Spain vs. 85bps in the U.K.
- Retailers are no longer willing to pay market rents, whether they are doing well or not.
- While lack of investor demand has softened retail pricing, occupier fundamentals will play a key role in 2020 with realisation that rents need to rebase, putting further pressure on capital values.
- Opportunities will arise in the medium term where solid occupier fundamentals are coupled with high-yielding assets so that retail becomes an income or value-add opportunity.
Logistics sector overview
- Logistics is enjoying a goldilocks period, with rising rents, falling yields and manageable supply levels.
- The key risk for logistics in 2020 is the global trade conflict removing cyclical support for the sector.
- Due to the structurally driven demand for logistics space in the current cycle, the past correlation of office and logistics markets may no longer hold when the business cycle turns.
Housing sector overview
- Lower-for-longer interest rates reinforce an investor focus on sectors benefiting from strong structural tailwinds.
- The housing sector appeals to capital which is attracted by past risk-adjusted performance and resilience.
- Challenges include achieving scale and operator efficiencies, with design and consumer preferences ever evolving.
- European markets are at different levels of sophistication and maturity, and hence pricing.
- Pricing is keen but value-add returns are achievable through forward funding and build-to-core strategies.
International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation.
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Nuveen Real Estate is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA). Nuveen Real Estate securities products distributed in North America are advised by UK regulated subsidiaries or Nuveen Alternatives Advisors LLC, a registered investment advisor and wholly owned subsidiary of TIAA, and distributed by Nuveen Securities, LLC, member FINRA.