European Property

Forecasts H1 2018
February 2018

This year, central banks around the world are expected to taper, end and unwind quantitative
easing, with government bond yields anticipated to increase in response. In time, as interest
rates rise, the property-to-bond yield gap will narrow (figure 1), making core and core-plus
investment strategies less attractive. However, property yields should be protected in 2018
by the above average yield gap plus investor demand for assets with growth potential, but
early cycle movers could include the Paris and Stockholm office markets where pricing for
core product looks less compelling.

Figure 1: Nominal Yield Gap - Prime Offices to Government Bonds %

5 Note: Q4 2022 is calculated using the Q4 2017 office yield minus the Q4
2022 bond forecast. This is for illustrative purposes and thus does not
4 incorporate our forecast for outward yield shift in the office sector.

N'lands UK Germany France Sweden Italy Spain

10y AVG Q4 2017 Q4 2022

Source: Cushman & Wakefield Research, Oxford Economics (Dec-17)

The Eurozone recorded its strongest annual growth in
a decade last year, estimated at 2.5% (figure 2). This
positive momentum is set to continue in 2018 assisted
by the pick-up in global trade coupled with strong
household consumption and healthy job growth. The
only slight concern is the recent strength of the Euro
which, if it continues, could impact exports and
household consumption. Thus far, the main currency
effect appears to be on inflation which is set to reduce
in the first part of the year before rising energy prices
push consumer prices back upwards until year end.
In contrast to the Eurozone, the UK economy slowed
to an annual growth rate of 1.8% in 2017 down from
1.9% in 2016. The modest reduction in growth rate,
combined with improving growth elsewhere, was
enough to move the UK from the joint fastest growing
G7 nation to the slowest. The prospect for 2018 looks
similar, albeit with a reduction in inflation, which will
help to ease the household income squeeze.
In 2017, prime yields across much of continental Figure 2: European Economic Growth, % pa
Europe continued to compress, albeit at a slower 3
rate than recent years. Notable exceptions to this
include the logistics sector and some of the EU’s UK
2
key office markets, where foreign capital continued
to support investor demand, pushing yields down at 1
a faster rate than the all sector European average. Eurozone UK underperformed
the EZ for 1st time in
0
5yrs
Since the global financial crisis, prime yields in the
EU’s key office markets have typically traded at 10 -1
basis points higher than the UK’s key office markets

2010

2011

2012

2013

2014

2015

2016

2017e

2018f
(figure 3). However, in 2016 that trend reversed,
while in 2017 the gap widened, with the UK trading
Source: Cushman & Wakefield Research, Oxford Economics (Dec-17)
at around 70 basis points higher than comparable
EU markets in Q4 2017. This is in part indicative of
the deteriorating UK economic outlook, concerns
about the advanced stage of the property cycle and Figure 3: Office Prime Yields, %
the uncertainty surrounding Brexit, coupled with an
7.5
improving economic growth story in the Eurozone.
7
6.5
Although rising bond yields are not an immediate EU (ex UK)
concern for most European property markets, due 6

to the above average property yield gap, there are 5.5

some markets which may be early cycle movers. In 5
particular, in 2018, we expect prime yields in Paris 4.5
UK
and Stockholm to soften, albeit modestly, as 4
investors shift their focus away from keenly priced
Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
core and core-plus product in order to focus on
value add and opportunistic strategies.
Source: Cushman & Wakefield Research

This corresponds with estimates on European fund

raising activity from Preqin / Capital Economics,
Figure 4: Capital raised by fund type, % capital raised
which show that around 60% of all capital raised in
2017 was for value add and opportunistic 40

investment strategies (figure 4). Indeed, value add

30
capital raising was c.30% higher than 2016 while
core and core-plus was c.30% lower. Furthermore, 20
the INREV annual investment intentions survey
10
reported that only 31.8% of investors preferred core
in Europe, down from 40.8% a year ago. In addition, 0
the proportion of private real estate funds that did
e

us

ed

ic

ed

er
eb
or

st

th
Pl

dd

ss

not achieve their fund-raising targets by close, also

D
C

ni

O
e-

tre
-A

tu
or

or
ue

is
C

pp

increased, approaching 50% up from 40% in 2016

l
Va

according to Preqin. Source: Preqin, Capital Economics

This suggests that investors are looking to mitigate Figure 5: European Office Supply and Demand
risks relating to the real estate cycle by selectively 4
allocating capital to assets that offer active
management opportunity, in order to boost returns Office employment growth, % pa, LHS

and partially offset any potentially less favourable 2

market movement over the coming years. However,

this raises a concern about increased risk-taking at
an advanced point in the cycle. 0

Nonetheless, there are reasons to be positive about Office completions, 000s sqm, RHS

the long-term. Pension fund assets in Asia continue -2

to grow strongly, supported by the rising middle

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
class, boosting overall investment demand for all
Source: Cushman & Wakefield Research, Oxford Economics (Dec-17)
asset classes globally. At the same time there has
been an enduring trend for investors to diversify
Figure 6: Prime Rental Growth, % pa, 2018-22
away from equities and bonds to a broader array of
assets including real estate. These trends are Strongest markets Weakest markets
supportive of a continuing weight of capital targeting
Budapest retail Geneva retail
European real estate over the long term albeit with
cyclical deviations. Moscow retail London (City) office
Moscow office Warsaw office
Prime rental growth across Europe’s top cities has
Dublin logistics Amsterdam logistics
gradually slowed over recent years with all sector
annual growth in 2017 at 1.1%, down from 1.6% in Lisbon retail Brussels logistics
2016 and 1.9% in 2015. Source: Cushman & Wakefield Research

Looking ahead, we expect that increased new

growth. The London office market appears to be at a
development supply, in certain locations, coupled
mature stage of the cycle with above average new
with historically high rents and slowing employment
supply and below average employment growth
growth (figure 5), will continue to place pressure on
expected in the short term, negatively impacting
rental growth, resulting in more markets with a weak
rental performance.
or moderate outlook versus a positive outlook.

In summary, over the medium term, we expect that

Eurozone markets that do offer stronger rental
prime yields will soften across Europe as the policy
growth opportunity over the next 5 years (figure 6)
environment changes and as base rates increase.
include Barcelona, Madrid, Dublin and Lisbon which
This dampens our total return expectations in the
are all still benefitting from a cyclical upswing after
later years of the forecast outlook, meaning that
being impacted the most during the GFC and
overall for the next 5 years we expect European all
Eurozone crisis. Outside of the Eurozone,
sector prime total returns[1] to deliver less than 3%
Budapest, Moscow and Istanbul also offer growth
per annum, with the European logistics sector
potential in certain sectors.
remaining our best performer followed by offices and
high street retail.
Generally, our view on the UK is less optimistic than
for Europe although bright spots do still exist,
[1] Prime total returns are indicative only. They are based on prime
notably in key regional markets, where low new headline rents and prime yields without accounting for occupancy rates,
supply in the office sector is supportive of rental capital expenditure, purchaser costs etc.
Figure 7: All Sector Prime Rental Growth, 2018-22

Source: Cushman & Wakefield Research

Author Contacts
Mark Unsworth Elisabeth Troni
Head of EMEA Forecasting Head of EMEA Research
+44 (0) 20 3296 4221 +44 (0) 20 3296 2121
mark.unsworth@cushwake.com elisabeth.troni@cushwake.com

Cushman & Wakefield Forecast Methodology

Cushman and Wakefield Research produce forecasts for 123 property markets across Europe, covering the office, retail
and logistics sectors. The forecasts are produced quarterly for annual data-points five years into the future and relate to
prime property. The forecast process includes a) property and economic data collection; b) estimation of econometric
models and forecast generation; c) review of forecasts with C&W local market teams; and d) final C&W commercial
property forecasts.

The forecasts include occupier market variables such as prime rents (across all sectors), office take-up, office vacancy,
office rent-free periods (where applicable), effective prime office rents, as well as investment market variables such as prime
yields. Occupier market variables are modelled by the fundamental interaction between demand and supply. On the
investment side, prime yield models are based on relative pricing, using the 10 year government bond yield as the
benchmark rate.

The combined quantitative and qualitative approach ensures that C&W forecasts are the result of rigorous analysis, but also
incorporate local market knowledge and characteristics that often cannot be quantified in models. For more information
please contact Mark Unsworth: mark.unsworth@cushwake.com

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