Login to access your documents and resources.
The client portal are currently unavailable
Which type of investor are you?
Macro outlook

Think European cities Q3 2019 outlook

Stefan Wundrak
Head of Research, Real Estate, Europe
Town view
Given the weakness of markets and confidence in H2 2018, the return of relatively solid economic expansion across Europe in Q1 2019 provides welcome relief. With Europe's four largest economies recording expansion, European Union (EU) member states, in aggregate, grew by 0.5% in the first quarter. That said, political risks are never far away in Europe and given the persistence of potential external shocks, growth estimates for 2019 and 2020 remain muted at just 1.3% and 1.5% respectively. 

The eurozone economy remains dominated by a wide divergence between healthy activity in services and a struggling manufacturing sector which is still reeling from the impact of several transitory shocks and a sharp deterioration in the external environment. A weakening fixed investment and export outlook reflects the soft economic sentiment, although positives can be taken from unemployment falling to a decade low. Fiscal policy should also be the most accommodative since 2010, providing some additional boost to growth this year.

The benign economic and inflation outlook means that the European Central Bank (ECB) will remain very cautious about withdrawing monetary support. Our view that the ECB will not raise interest rates until 2020 and that the normalization path will stay very slow, has been consistent. The marked retreat in U.S. 10-year treasuries from 3.3% to 2.4% since mid Q4 2018, and an accompanying more dovish tone, echoes this mantra. Meanwhile in the United Kingdom, the direction of the Bank of England will depend on any final agreement reached (or not) with the EU. Unable to come to an agreement on the terms of Brexit in the U.K., the EU has accepted a further extension of the Article 50 deadline to the end of October 2019.

It is still our assumption that some agreement is penned with the EU. However, our revised lower long-term economic rates are also a reflection of changing demographic and productivity trends indicative across many developed economies. These are shaping future long-term borrowing rates and, consequently, capital flows across asset classes. A demand-led shock, amplified by technological or structural change, is the biggest concern for real estate investors as the traditional causes of corrections, namely excessive debt or a supply glut, are currently not present.

 

Table: Economic dashboard - market recovery in H1 2019

Office sector overview 
  • Many European economies are performing well domestically, despite the negative external environment. 
  • Leasing markets have softened slightly in many cities in Q1 2019, but the underlying momentum is very healthy. 
  • Slower leasing in some cases reflects very low vacancy and a lack of options for tenants.
  •  Positive short-term growth outlook.
  • Nominal rents are relatively high in many cities, but with supply relatively disciplined and inflation subdued.
  •  Financial shock is likely to be the key disruptor to the otherwise rosy outlook.


Retail sector overview 
  • Retail sales remain solid across the European economy.
  • Contraction is taking hold in the investment market ahead of the occupier market.
  • Online retail sales are eroding in-store sales across the market, but most of the region is some way from the U.K.'s tipping point.
  • Food-led retail offers more reliable growth.
  • The window is still open to dispose of non-core assets before pricing worsens.


Logistics sector overview 
  • Strong value increases since mid 2017, due to significant yield compression and rental growth.
  • Unexpected development activity has met strong structural and cyclical demand for modern space.
  • Rental growth has picked up, although remains more modest than widely assumed.
  • Trade disputes and economic weakening has cast a shadow over the demand side, but currently the structural demand factors outstrip cyclical issues. 
  • The economic slowdown has had little impact on logistics occupier markets.


Housing sector overview 
  • In all its guises, the housing sector appeals to investors who are attracted by past performance and projected resilience.
  • Challenges include achieving scale and operator efficiencies.
  • Pricing reflects that European markets are at different levels of sophistication and maturity.
  • There is an under-supply of purpose-built build-to-rent, student housing and healthcare assets across Europe.
  •  Pricing is keen but value-add returns are achievable through forward funding and build-to-core strategies.


 

Read the full report

Contact us
Our offices
London skyline
London
201 Bishopsgate, London, United Kingdom

This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. 

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof. 

Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate.

This information does not constitute investment research as defined under MiFID.