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Investment outlook

European real estate 2019 outlook

Stefan Wundrak
Head of Research, Real Estate, Europe
Frankfurt City Skyline

Political uncertainty and rising trade tensions are undermining exports and investment, and will temper near-term output. The complexity of the U.K. talks with Brussels and the lengthy transition period, should an agreement be achieved, will deflate U.K. prospects in the near term. Jittery financial markets are illustrative of widespread political uncertainty, particularly in the U.K. and Italy.

On a positive note, the Eurozone’s unemployment rate has shrunk to a decade-low of 8.1%. This number disguises major differences at a country and city level, but the pace of job creation is broadly healthy.

Yield compression has come to an end in Europe and while we don’t expect an imminent yield softening, there will be no additional support from capital markets. Real estate capital values may still rise further in 2019 due to the persistent rental cycle, albeit also at a somewhat slower pace compared to 2018.

Office rental growth continued to gain momentum across many markets in 2018; elsewhere, rents were broadly stable. Future growth is expected for most key office markets in the short term, with the exception of London. Paris, Amsterdam and Spanish cities look best-placed for growth in the short term.

Retail rental growth across 2019 is expected to be strongest in Spain and Portugal, where rents remain below their cyclical peak and markets are experiencing a later recovery. Elsewhere, it is hard to envisage retail rental growth other than for stand-out assets or locations.

Logistics is set to be the best-performing mainstream sector with healthy rental growth and even some further yield shift driving returns in 2019. However, it will be non-established sectors such as student housing or other sub-sectors in the living space, which are poised to perform best overall. These sectors are supported by new technology and demographics, as well as first mover advantages for investors which already have exposure to these segments. The worst performing sector is expected to be retail, where the U.K. is already seeing the financial impact of e-commerce on real estate values.