EUROPEAN PROPERTY MARKET

OUTLOOK H2 2021
AT THE FOOTHILLS OF A NEW CYCLE

I N T E R N AT I O N A L R E S E A R C H

Real Estate for a changing world

 CONTENT
THE ECONOMIC OUTLOOK
4 ‘CAUTION’ IS THE WATCHWORD

7 EUROPEAN REAL ESTATE PERSPECTIVE

A (RE) NEW CYCLE BNP Paribas Real Estate is part of the BNP Paribas Banking Group

SECTOR PROSPECTS
11 CHANGING FACES
All rights reserved. The report was prepared by BNP Paribas Real Estate.
All data provided in the publication have been carefully verified, however
the authors of the report shall not be held liable for any damage or
loss which may arise from the use of the data published. Reproducing,
modifying or using any of the contents hereof without the permission of
the authors of the publication is prohibited under the provisions of the
applicable law. It is permitted to quote the contents of the publication

12 OFFICE | 15 RETAIL | 18 LOGISTICS | 21 RESIDENTIAL only when clearly stating the source.

24 APPENDIX PICTURE CREDENTIALS

Cover, P2-24: Shutterstock
P25: BNPPRE archives

2 EUROPEAN PROPERTY OUTLOOK H2 2021

 FOREWORD
THE EUROPEAN ECONOMY,
AND BY EXTENSION THE REAL
ESTATE MARKETS ARE AT THE
FOOTHILLS OF A RENEWED UP-CYCLE.
HOWEVER, THIS CYCLE WILL BE
DIFFERENT FROM THE ONES THAT
HAVE GONE, WITH ALTERNATIVE
MARKETS SUCH AS THE LIVING
AND LOGISTICS SECTOR, AND
EMERGING ONES, LIFE SCIENCES,
FIRMLY IN THE DRIVING SEAT.
T
he global economic recovery is occuring
at different speed, between countries with
high vaccination rates (developed nations),
and countries with low vaccination rates
(emerging markets). There is no guarantee
of steady recovery anywhere while the virus and
its mutations dominate regions of the world. With
this in mind the generalised response has been
caution. From consumers through to businesses
as reopening rolls forward, caution will shape fu-
ture economic development. Nonetheless, we see
a robust, in the short-term, but also a meaningful,
in the medium-term, GDP growth across Europe.
This will come with strong inflation, which is typi-
cally good for rental indexation.
Admittedly, for real estate the economic fallout
has had a differentiated impact on the various
sectors within it. While retail suffered signifi-
cantly, the performance of prime and non-pri-
me offices were polarised; and the logistics
and living sectors, gained significant traction.
In this regards not all the sectors have correc-
ted, yet in our view the tide of economic re-
flation will lift all the sectors, albeit unevenly,
over the medium term. We are at the beginning
of a new cycle, which promises to be different
as investors re-weight their portfolio towards
new and emerging sectors. We see Environ-
mental, Social and Governance (ESG) issues
at the heart of all investment decisions going
forward.
How these issues affect the outlook for the Eu-
ropean real estate markets is the focus of this
report and the accompanying forecast num-
bers. In our view, rental value growth will be
good in all sectors, driven by a strong econo-
mic growth and inflation. For markets where
shortage of space exists, this will give additio-
nal impetus for a more robust rental growth.
Moreover, in the logistics and residential spa-
ce there is further improvement in pricing to
come. In addition, the repricing in the retail
sector may be reaching a trough. In the office
sector, ESG compliance means secondary buil-
dings will require increased capex, limiting any
value growth. However, prime assets are likely
to attract increased demand, from both occu-
piers and investors, which is positive for values
in this space. In all cases, real estate remains
a relatively attractive asset class with renewed
drive at the start of a new cycle.
SAMUEL DUAH
Head of Real Estate Economics
International Research
EUROPEAN PROPERTY OUTLOOK H2 2021 3
Economic O U T L O O K
‘CAUTION’
W
orld economic growth is clearly split The generalised response to this risk is cau- face as households and business respond to
between countries with high vac- tion. From consumers through to businesses changes in emergency policy support.

IS THE WATCHWORD cination rates (developed nations)

and those with low vaccination rates
(emerging markets). Yet there is no
guarantee of steady recovery anywhere while
as reopening rolls forward, caution will shape
future economic development. As a result, European economic recovery may
only truly be assured by 2023. European coun-
Divergent recoveries suggest tries are concentrating on ramping up their

“
REMOVAL OF THE POLICY
SUPPORT BANDAGE IN 2022
WILL REVEAL THE EXTENT
OF ECONOMIC SCARRING
“ worsened in other countries, and the return of
the virus and its mutations dominate regions
of the world.
While around 40% of the developed world’s po-
pulation are fully vaccinated, the pandemic has
the virus in any significant form poses the lar-
gest risk to economic recovery. Reducing trans-
missibility matters significantly for developed
nations and is likely to see renewed efforts
over 2022 to improve vaccination in developing
and emerging countries.
normalisation may not occur until 2023
BNP Paribas, in line with other forecasters, an-
ticipates a strong global recovery over 2021 of
around 6%, easing off in 2022 to 4.8%.
The fall back in 2022 mostly reflects the gra-
dual withdrawal of policy support and switch
to private-sector-led growth. Governments are
unlikely to go ‘cold turkey’ on the removal of
fiscal support to businesses and households
given the uncertainty surrounding the pande-
mic’s evolution. Economic risks may also sur-
vaccination rates and reducing restrictions on
movement over 2021. This is positively corre-
lated with the economic recovery seen so far.
The acceleration in growth has come from the
increase in tradeable goods and mobility seen
since April. Mobility data (Exhibit 1) suggests
that intra-EU tourism is reviving, something
that the EU Digital COVID Certificate, operatio-
nal as of 1 July 2021, will help to boost as it
allows cross-border travel.
Private consumption increases, partly from the
use of personal savings, are 2021’s ‘accelerator

4 EUROPEAN PROPERTY OUTLOOK H2 2021

 ECONOMIC OUTLOOK

+4.8%
of growth’ in contrast to 2020’s government fis- ce. While France is likely to fall back to 4.6% in The mismatch between supply shortages and
cal support. Nonetheless, the Next Generation 2022, Spain may grow faster at 6.3%. Stronger increasing demand are fertile conditions for an
EU recovery fund should be operational by the growth here comes from more solid recovery in inflation spike, which is currently building in
end of 2021 and provide a pro-cyclical growth the tourism sector, important to Spanish GDP, Europe.
boost that will further support spending. yet one of the slowest sectors to regain traction. EUROZONE GDP GROWTH
BNP Paribas forecasts that Eurozone infla-
The UK is furthest ahead in terms of opening up Italy is likely to see growth of 5.2% in 2021 and tion might expand from 0.3% in 2020 to 2.1%
IN 2021
the economy, although other European nations slow to 4.5% by 2022. Germany’s forecast is for in 2021, before falling back to 1.8% in 2022.

+2.1%
are not far behind. As such the UK may expe- growth of 3.7% in 2021 and, like Spain, it might Germany may witness the strongest inflation
rience the most robust GDP growth in 2021 accelerate in 2022, to 5.5%, reflecting an im- at 2.7% in 2021 before fading to 2% in 2022.
(+7.0%) falling back to 4.8% in 2022. The UK’s provement in services and in the export sector The UK is likely to increase from 0.9% in 2020
growth has been earlier and stronger compa- as bottlenecks in global supply chains reduce. to 1.8% in 2021 and stay elevated at 2.5% in
red with the Eurozone (Exhibit 2). 2022. EUROZONE INFLATION RATE 2021
Rising inflation is mostly temporary
Among the Eurozone countries, France and Spain Inflationary growth is largely from temporary

-0.37%
are likely to see the healthiest recovery in 2021 The Purchasing Manager Survey is pointing to factors, such as base effects from last year. In
at 6%. France is benefitting from an acceleration increased delivery times for goods, a situation Germany’s case, it also reflects the reversal of
in its vaccination programme that has resulted worsened by shipping disruption (containers the temporary VAT cut in 2020. Increases are
in earlier-than-expected removal of restrictions, stranded in ports) leading to an escalation in confined to a small number of items, such as
thus boosting consumer and business confiden- shipping prices. semi-conductors specifically feeding into hi- BUND YIELD 2021

Exhibit 1: MOBILITY ACROSS EUROPE (% DIFFERENCE FROM BASE (JAN-FEB, 2020)) Exhibit 2: GDP GROWTH (%, Q/Q)
Belgium France Germany Italy Poland Spain United Kingdom Eurozone UK
10 7,0
0
6,0
-10
5,0
-20
4,0
-30
-40 3,0

-50 2,0
-60 1,0
-70 0,0
-80
-1,0
01.01.2021

08.01.2021

15.01.2021

22.01.2021

29.01.2021

05.02.2021

12.02.2021

19.02.2021

26.02.2021

05.03.2021

12.03.2021

19.03.2021

26.03.2021

02.04.2021

09.04.2021

16.04.2021

23.04.2021

30.04.2021

07.05.2021

17.05.2021

21.05.2021

28.05.2021

04.06.2021

11.06.2021

18.06.2021

25.06.2021

02.07.2021

09.07.2021

16.07.2021

23.07.2021

-2,0
Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022
Source: Google Moilbity Trends https://ourworldindata.org/covid-google-mobility-trends Source: BNP Paribas Global Outlook

EUROPEAN PROPERTY OUTLOOK H2 2021 5

ECONOMIC OUTLOOK

gher electronic and car prices. Meanwhile,

commodity prices seem to be increasing at a
Monetary policy committed to support Consequently, the ECB intends to keep buying
bonds and maintain its negative interest rates
riant, the asset market remains positive, in par-
ticular equities, which are seeing the highest
faster rate with the strengthening global re- recovery to break this pattern. The Pandemic Emer- boost to earnings since the GFC. For equities,
covery. However the rising oil price is a key gency Purchase Programme (PEPP) will most it suggests that rising costs for business along
cause of price growth (Exhibit 3) as they are Some uncertainty lies in whether inflation may certainly run until March 2022, while the Asset with slowing economic growth from 2022 may
reversing the lows seen in 2020. There are also persist at an elevated level (if supply cons- Purchase Programme (QE) will continue with lead to a profit squeeze.
increases in metals and food prices that stem traints do not correct). Central banks do not €20 billion purchases. The ECB is not intending
from the transitory shortages caused by spen- seem to consider this an issue as their man- to taper its activity, unlike its counterparts, the Similarly, the bond market continues to at-
ding shifts during the pandemic. Almost all dates encourage them to take a longer view. US Federal Reserve and Bank of England. The tract investment as there is sufficient concern
these increases should work out of the index Given that the inflation thrust is likely to peter latter is likely to start scaling back its asset over the Delta variant for bonds to maintain
over the coming year. out in a year (and policy looks at a two-year buyback programme and, should inflation con- investor demand. Inflation may be more of an
framework), there is little sign of a rush to tinue to stay elevated, may consider increasing issue for UK bonds as QE ends and the Bank
The high unusual consumer spending, imme- respond. At the June meeting of the ECB, the rates in 2022. of England adjusts interest rates (Exhibit 4). In
diately after the pandemic, is likely to ease over central bank said it was willing to accept an Europe, prolonged monetary policy accommo-
2022 as economies gradually return to normal. overshoot of its inflation target. In part, this The asset market is stable dation is likely to restrain any shift upwards in
This will take the edge off price growth. In ad- acknowledges the ineffectiveness of previous bond yields over the next few years.
dition, the supply side will adjust as production policy in dealing with persistently low inflation Monetary policy is ensuring that financial con-
increases and shipping capacity adapts and im- that has dogged the European economy since ditions remain broadly supportive. Aside from
proves to address supply-demand mismatches. the Global Financial Crisis (GFC) in 2008. the volatility induced by Covid-19’s Delta va-

Exhibit 3: BRENT CRUDE PRICE ($/BARREL, SPOT) Exhibit 4: 10YR GOVERNMENT BOND YIELDS (%)

Belgium France Germany Italy Poland Spain United Kingdom

80 3,0
70 2,5
60
2,0
50
1,5
40
30 1,0

20 0,5
10 0,0
0
-0,5
30.12.2019

30.01.2020

29.02.2020

31.03.2020

30.04.2020

31.05.2020

30.06.2020

31.07.2020

31.07.2020

30.09.2020

31.10.2020

30.11.2020

31.12.2020

31.01.2021

28.02.2021

31.03.2021

30.04.2021

31.05.2021

30.06.2021

-1,0
2019 2020 2021 2022 2023 2024
Source: Macrobond Source: Moody’s

6 EUROPEAN PROPERTY OUTLOOK H2 2021

European Real Estate P E R S P E C T I V E
A (RE) NEW CYCLE
2021
is proving to be a year
of transition for the
European real estate
markets. The success-
LIQUIDITY IS ABOUT TO FLOOD ful rollout of vaccina-
BACK INTO THE MARKET
tion programmes across many countries has
paved the way for governments to ease res-
trictions and gradually return economies to
some sense of normality. For real estate tran-
sactions, this is a relevant development, since
the ability to visit a building is an important
part of the acquisition process.
We see the beginning of an increasing deal
flows, from the lows seen during the pan-
demic. Total investment volume in Europe
at the halfway point of 2021 stood at €105
billion (- 5%, on same period in 2020), with
particularly strong activity in the second
€260bn
quarter. We expect transaction volume to in-
crease for the year as a whole in 2021 and
2022 (Exhibit 5).
+10% vs 2020 INVESTMENT VOLUME
The increased activities suggest the European
130bps
market is at the foothills of a new cycle. Howe-
ver, what can we expect from this new cycle
of investment? We have already seen, during
the pandemic, more capital directed towards
the non-traditional asset classes and logistics, SPREAD OF PRIME OVER AVERAGE
where prospects for rental and capital growth
look promising over the medium term. We see
OFFICE YIELDS
6%
this continuing in 2021, underpinned by chan-
ges in the regulatory environment as well as
consumer and occupier preferences. This sug-
gests the new cycle will equally be different, in
terms of the sectors where investors will be
focusing.
5YR WEIGHTED AVERAGE
EUROPEAN PRIME TOTAL RETURN
EUROPEAN PROPERTY OUTLOOK H2 2021 7
EUROPEAN REAL ESTATE PERSPECTIVE

Capital growth to play greater role
in returns
Over the forecast period (2021 to 2025), capital
growth is likely to strengthen as a component
of total return (Exhibit 6). Strongest capital
growth may occur in logistics with a European
average of 3.2% leading to total return of 7.4%
over 2021 to 2025. Offices are more polarized.
For the prime segment capital growth may
form around half of the forecast 6.0% return.
And for the sector as a whole, capital growth
(+0.9%) will form a small proportion of the an-
ticipated total return (+5.2%). This is sugges-
tive of the increased capex requirement going
forward for secondary and tertiary assets.
Unsurprisingly, retail has the lowest forecasted
returns. Capital growth for prime high street
(-0.4%) and shopping centres (-1.6%) will likely
remain negative over the forecast period. Total
returns are positive and are driven entirely by
high-income return.
Although for the best quality assets capital
growth may play a much greater role (with the
exception of logistics), markets are still a long
way from the double-digit returns that charac-
terised the market post-GFC 2014 to 2019. Over
the forecast period, the best performing pri-
me office markets may be Stockholm (+8.5%),
Manchester (+8.1%), London (+7.4%), Berlin
(+7.4%) and Lyon (+6.6%).
Logistics is the only sector likely to see dou-
ble-digit returns, but only in a limited number
of markets. The top performing markets may
be Poznan (+11.2%), Copenhagen (+10.9%),
Warsaw (+10.4%) and West Brabant (+10.1%),
“
THIS NEW CYCLE WILL BE DEFINED BY DIFFERENT METRICS:
ALTERNATIVE ASSET CLASSES, ESG AND MODERATE RETURNS
“
all locations with deep global connections to tres imposed only limited control on numbers
global supply chains, where recovery over the (500 max in a shop), meaning the sector had
forecast period comes from trade moving up fewer operational issues than elsewhere.
a gear.
Focus on core assets; but don’t ignore
High Street Retail’s best performers are likely
to include Milan (+5.7%), Rome (+5.3%) and
non-core locations
Madrid (5%). These are cites with a strong in- Based on our 5yr forward-looking returns
ternational dimension and a building recovery forecast we have constructed a scorecard
in tourist trade. Shopping centres may see showing the relative attractiveness of the
lowest performance across Europe. Sweden countries we cover. We have done this for
(+5.6%) and the Czech Republic (+5.0%) may each of the three main sectors. This shows
see the strongest returns, the former because that some of the most attractive markets, on
of looser lockdown rules, where shopping cen- a non-risk adjusted forward return basis, are

Exhibit 5: INVESTMENT VOLUME (€bn) Exhibit 6: AVERAGE TOTAL RETURN (2021-2025, % P.A.)
Office Logistics Retail Alternatives Income Return Capital Growth Total Rturn

350 8,0
7,0
300 7.4
6,0
5,0 6.0
250
5.2
4,0
200 3,0 4.0
3.7
2,0
150
1,0
100 0,0
-1,0
50
-2,0
- -3,0
15 16 17 18 19 20 21* 22* Prime Offices Average Offices Prime Logistics Prime HS Retail Prime SC Retail
Source: BNP Paribas Real Estate Source: BNP Paribas Real Estate

8 EUROPEAN PROPERTY OUTLOOK H2 2021

 EUROPEAN REAL ESTATE PERSPECTIVE

Exhibit 7: RELATIVE SCORE CARD likely to be outside the core Western European nary pressure will provide an even bigger impetus vestment in the BTR sector over the pandemic,
region (Exhibit 7). for stronger rental growth. gives rise to the prospect of a rapid rental increa-
se once the final pandemic support measures end.
Office Logisctics Retail * All Property
In the western European markets, our view is that Sheds and beds will see strongest
Sweden 10 9 8 10 the U.K. (7) is at a turning point and presents at- rental growth Retail reinvention may result in better
Hungary 8 9 10 10
tractive opportunities at this stage, for superior re- rental performance
turns compared to the core markets. The outlook Logistics and residential are clear sectors where
Poland 3 10 6 9 for rental growth remains fairly balanced. Howe- demand stayed ahead of existing supply during Retail is the sector with the greatest dispari-
ver, spread of prime office yield over other mar- the pandemic. Occupational rates for logistics ty in alignment: massive supply and weak de-
Portugal 8 8 9 9 kets such as Berlin (+150bps) and Paris (+130bps) actually improved over 2020, with a number of mand. Whilst rising inflation will likely provide
remains very high and unsustainable. This dis- markets posting record-breaking levels of take-up. support for rental growth, the current occupa-
Romania 9 8 3 8 count is likely to narrow in the quarters and years Construction rates for sheds are lagging demand, tional dynamics will limit any rental growth
Italy 2 5 10 8 ahead, generating a relatively higher return. with limited speculative development. Access to that might emerge from the inflationary push.
land is a limiting factor. Tight demand and supply Yet unlike residential and logistics, this sector
UK 10 4 5 7 Overall, three market areas are likely to show the imbalance means rental pressures are building. is characterised by multiple occupational types,
most balanced performance: Sweden (10), CEE and that puts rental growth on a very wide
Austria 7 6 4 6
(9) and Portugal (9). Sweden stands out in parti- Housing rent forms a (small) component of the spectrum. The worst performing sector is likely
Belgium 4 2 9 6 cular, because of good tenant prospects with mo- HCPI measure of inflation. Post-GFC, the relati- to be shopping centres. This type of retail is
dern office stock, growth in logistics activity and ve contribution to Euro area inflation is declining. still in the process of reinvention and inflation
Denmark 3 10 1 5 fewer operational problems in its retail sector. Low supply of housing, and a huge surge of in- is only likely to offset rental decline.

5 7 3 5
Czech Republic
Rising inflation will bring increasing
Finland 9 1 7 4 rents; but differentiated Exhibit 8: CONSUMER PRICE INFLATION (%, Y/Y)
Spain 1 6 8 3 The strong rebound in the European economy co- UK Eurozone
mes with a resurgence in consumer price inflation
Norway 6 1 6 3 6,00
across many countries (Exhibit 8). In the UK, we
Ireland 1 4 5 2 are already seeing inflation above the BoE target 5,00
and in the Eurozone just at the target. While there
Germany 6 2 2 2 is debate currently as to the transitory nature of 4,00

price increases, we expect the inflationary shock 3,00

France 5 5 2 1
will translate into something more persistent over
2,00
Netherlands 2 3 1 1 time. In our central case, inflation eventually sett-
les at levels that are higher than that in the recent 1,00
Source: BNP Paribas Real Estate
past. This is supportive for rental growth, particu-
Note: 0,00
(a) Scores are based on relative forward looking 5yr average larly in markets where there is rental indexation.
(Non-Risk Adjusted) total return in the sector
(b) 1 = Lowest & 10 = Highest For markets and sectors where supply – demand -1,00
(c) * Base on a weighted (40% Offices, 30% Logistics and 30% Retail)
average of total returns imbalances exist (for example logistics), inflatio- 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 9

 EUROPEAN REAL ESTATE PERSPECTIVE

Prime vs Secondary Offices: king practices and ESG. These factors did not continue to think investor focus will be on modern cities, led by Berlin, and UK cities, particularly
a diverging story exist in the post-GFC recovery, but are now de- asset, particularly in the office sector, as a strategy London – historically a leading city in cycles.
fining the new cycle. This implies greater pola- to avoid capex on non-modern buildings in the age
In the office sector, supply remains in check rization in product, with secondary assets nee- of ESG compliance. Restructuring will be a key fea- For logistics, Copenhagen is the stand out city,
and, although demand clearly weakened over ding capex to future proof against these trends. ture of the market over the recovery period. even compared to other locations in the CEE like
the last year, return to office is seeing occu- Poznan and Warsaw with similar level of total
pational demand pick up again, even in places Real Estate Market Momentum Exhibit 9 shows the spectrum of performan- returns. The retail sector continues its low mo-
like Spain and Italy that have historically la- ce outcomes that may occur. The sectors that mentum, which should not surprise investors.
gged the recovery. However, the recovery will Most European markets witnessed good in- offer the best balance of capital growth and Positive returns will be concentrated within hi-
not be the same as that following the GFC, vestment activity in Q2 2021 that confirms the rental performance over the 5-year period in- gh-end luxury, units that are the only provider in
when there was surplus of modern space with pandemic-induced hiatus is now over. clude offices and logistics. For offices, capital an area, and retail parks, all of which have seen
large floorplates at cheap prices. growth focused on modern units favours esta- resilient footfall throughout the last 18 months.
The focus of competition in the next cycle will be blished and deep core markets where Grade A Overall, the sector still has a shroud of uncer-
Build quality will almost exclusively form the for futureproof units in the traditional sectors and assets account for an above-average share of tainty over it because the pandemic has accele-
basis of today’s recovery, driven by hybrid wor- units of the right scale in new growth areas. We total stock. That includes the principal German rated restructuring and change of use strategies.

Exhibit 9: EUROPEAN REAL ESTATE MOMENTUM

8,0

Logistics West Brabant

Poznan Copenhagen
6,0 Offices Warsaw Stockholm
High Street Retail
Average Prime Rental Value Growth (2021-2025), % p.a.

Shopping Centre Lyon Stockholm London - WE London Berlin

Madrid London - City
Vienna
4,0 Barcelona Cologne
Paris Lisbon
Prague Manchester
Lille Milan
Bordeaux Munich Stuttgart
Stockholm Budapest
Milan Lisbon Brussels Frankfurt
2,0 Barcelona Dusseldorf North West (UK)
Madrid Rome Venlo Prague Midlands (UK)
Berlin Warsaw Lille Helsinki
Dublin Birmingham
Munich Budapest
Madrid Barcelona Sweden
Vienna
0,0 Oslo Bucharest Helsinki
Dublin Hamburg Oslo
Paris Frankfurt Germany La Defense Czech Republic
Prague Ireland
France Amsterdam Frankfurt
Bucharest South East (UK) Milan
-2,0 London
Spain Oslo Brussels
Amsterdam Netherlands Valencia
Birmingham UK Rotterdam
Copenhagen Berlin Copenhagen
Glasgow Manchester Amsterdam Marseille
Italy Marseille Vienna
-4,0 Central Paris Helsinki
Munich
Hamburg Lyon Hamburg

-6,0
-6,0 -4,0 -2,0 0,0 2,0 4,0 6,0
Average Prime Capital Value Growth (2021-2025), % p.a.
Source: BNP Paribas Real Estate

10 EUROPEAN PROPERTY OUTLOOK H2 2021

Sector P R O S P E C T S
Challenges and opportunities
in a new cycle
The biggest fall in economic activity for a cen-
tury has left the European real estate market
standing at the foothills of a renewed upward
cycle. A reflation of the economy will bring po-
sitive implications for rental outlook across the
sectors. However, in this new age of economic
revival and ongoing societal changes, the new
real estate cycle will be different.
Investor preference within the asset class is pi-
voting towards the living and logistics sectors.
In the Office segment, changes in regulations
and working behaviour means modern and
prime properties are preferred to non-prime;
and the position of retail in all these changes
remains influx.
CHANGING FACES OF THE REAL ESTATE SECTORS
The Future of the offices
It is difficult to predict the impact that flexible wor-
king practices will have on future office demand, but
we are likely to see a fall in average floorplates requi-
red. Moreover, the evolution of the workplace is con-
current with the ESG revolution. This will be key dri-
ver for the long-term value of offices. With a myriad
of approaches being adopted for the post-pandemic
workplace, incorporating all aspects of ESG will be a
challenge. This will further drive a wedge between
demand (both occupier and investor) for prime and
non-prime assets, with implications for widening the
rental values and yields in the office segments.
A Logistics sector on the march
The pandemic has highlighted and reinforced
the existing strengths and weaknesses of the
sector, with numerous border closures exposing
the vulnerabilities on a global supply chain. The
implications is an increased desire for a return
to a more nationally or regionally oriented pro-
duction (“reshoring”). This is increasing demand
for industrial space. Moreover, e-commerce,
which is still gaining momentum, remains the
main driver for logistics. All this is reflected in
an increasing shortage of space, rising rents and
investor interest in the sector.
Retail: Nearing the bottom
Despite the acute challenges faced by the retail
sector over the pandemic, there are reasons to
be cautiously optimistic. Lockdowns have been
synonymous with consumers shopping locally.
With a large part of the population expected to
continue working from home, this trend could
endure with resultant permanent boost to local
retail. In the wider retail sector, the situation
remains fragile, however as restrictions begin
to be eased the sector can begin to focus on
adapting to the post-COVID world.
A deeper private rental market
Lockdowns, health restrictions and homewor-
king have completely changed housing de-
mand. Despite the continued urbanisation
across Europe, demand for housing is strongest
in the outskirts of large and medium cities offe-
ring improved amenities. Driven by the desire
for a more modern and larger dwelling, with
dedicated space for homeworking and shared
spaces. These developments speak to further
growth in the Build to Rent (BTR) sector over
the coming year.
EUROPEAN PROPERTY OUTLOOK H2 2021 11
OFFICES ‘Trial and error’ a week) will translate into a 10% reduction in turned negative for the first time in 2020 (Exhi-
occupier demand. The severity of the pandemic bit 10). However, as occupier confidence retur-
If this pandemic has taught us one thing, it is meant net demand for office space, in Europe, ns we do expect net absorption to recover this
that most office workers across Europe have
successfully been able to work remotely, at
THE BIG DIVIDE: least in the short term. However, the debate
Exhibit 10. NET ABSORPTION (thousands sqm)
TO RETURN OR NOT TO RETURN surrounding the return to the office remains
polarised. Several organisations have introdu-
TO THE OFFICE ced hybrid ways of working, with employees
6 000
Europe BENELUX France Germany Nordics CEE Southern Europe United Kingdom

dividing their time between working remotely

and the office. The impact of a hybrid approach 5 000
is still uncertain, particularly as social distan- 4 000
cing rules across Europe are still in place. In
3 000
the short to medium term, many occupiers
will look at trialling several approaches. The 2 000
success rate will vary depending on the job and 1 000
the industry.
-

BNP Paribas Real Estate’s base case assump- (1 000)

tion is that a 20% increase in employees opting (2 000)
to work from home (at least a couple of days 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Source: BNP Paribas Real Estate

12 EUROPEAN PROPERTY OUTLOOK H2 2021

 SECTOR PROSPECTS OFFICES

Exhibit18,011. VACANCY RATE VS COMPLETIONS (%) the medium term, vacancy rates are expected Prime and average yields to widen
to increase further.
Manchester
16,0 Over the next five years we project that, Eu-
As anticipated, prime rental growth for Euro- ropean prime yields will decompress by 20bps,
14,0 pean offices will moderate over the next three while market yields will remain stable. The di-
years, with rental growth averaging 0.8% p.a. vergence in prime and market yields (Exhibit
End 2020 Vacancy Rate

12,0 Helsinki
Bucharest La Defense However, Bucharest (-2.7%), Lisbon (-1.7%), Bar- 12) has been exacerbated by COVID-19 and will
10,0 Milan Warsaw celona (-1.6%), Madrid (-1.5%), Paris La Défense only grow. Moreover, the demand for flexible
London-City
Rome
Madrid
Copenhagen Dublin (-1.2%) and Budapest (-1.1%) will all see rents and modern buildings that have a low carbon
8,0 Dusseldorf Oslo Budapest
Brussels
Birmingham declining by more than 1% in the same period. footprint will further widen the divergence.
Edinburgh Greater Paris Barcelona Prague
Lisbon

“
Stockholm
6,0 Lyon London-WE

4,0

2,0

0,0
0,0
Paris-CBD

2,0
Lille
Vienna
Amsterdam

Cologne
Hamburg

Stuttgart

4,0
Munich

6,0
Marseille

8,0
Berlin

10,0
Bordeaux

12,0 14,0 16,0

COVID-19 HAS ACCELERATED THE NEED FOR MODERN AND FLEXIBLE WORKING
SPACE, WIDENING THE SPREAD BETWEEN PRIME AND AVERAGE YIELDS
“
(2021-2023) Completions as % of Current Stock
Source: BNP Paribas Real Estate

year, back into positive territory with the UK

and Southern Europe lagging the rest of Europe.
Moderate increase in vacancy; Exhibit 12. EUROPEAN OFFICE NET INITIAL YIELDS (%)
There will be a stark difference in the speed at but disparities exist Market Average Prime Segment
which physical offices are re-occupied, parti-
6,50
cularly between the UK and the rest of Europe. An uptick in the vacancy rate is inescapable
(Exhibit 11). The European vacancy rate is 6,00
A tapering-off in occupier demand and heigh- expected to continue moving up from 7.2% in 5,50
tened uncertainty has already affected office 2020 to 7.9% in 2021, peaking at 8% in 2022
5,00
take-up, which fell 40% in 2020 compared to before it begins to fall back. The lowest va- 1.14bp
2019. Although we do not anticipate offices cancy rates in 2021 will be seen in Berlin 4,50

to be fully occupied at least until the end of (3.1%), Stuttgart (3.3%), Cologne (3.7%) and 4,00
2021, take-up is likely to begin recovering as Bordeaux (4.2%), all of which will see rates 3,50
1.30bp
uncertainty subsides, increasing by 7% in 2021 move out until 2024 before they drop. War-
3,00
compared to 2020. There will be a faster reco- saw (12.5%), Bucharest (11.3%), Helsinki (13%),
very in take-up in Barcelona (59% p.a. in 2020- Paris La Défense (15%) and Manchester (16%) 2,50
2021), Paris CBD (52%), Cologne (42%) and Cen- have the highest vacancy rates. Moreover, due 2,00
tral London (29%). to increased new supply in these markets over 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 13

SECTOR PROSPECTS OFFICES

“
European offices still offer positive returns in
the medium term, with prime returns of around
6.3% over 2021-2023. Market returns for Euro-
NEW OFFICE DESIGNS WILL NEED TO ADDRESS A RANGE OF FACTORS, INCLUDING
ESG, IN ORDER TO FUTURE-PROOF THEM AND STAND THE TEST OF TIME
“ 8.0%
pe will be slightly lower, averaging 4.5% over
the next three years. EUROPEAN VACANCY RATE
The future of offices BY END 2022
plans to convert empty offices into 1500 homes by post-pandemic workplace, incorporating all as-

It is difficult to predict the impact that flexible
working practices will have on future demand
for offices, but are likely to see average floor-
plates shrink somewhat. Occupiers will be loo-
king at ways to reduce their office space or to
reconfigure it for improved utilisation.
What will this mean for obsolete office space? The
2030. Even so, transforming offices to residential
or changing their function is not a straightforward
process and, in certain cases, could require subs-
tantial refurbishment costs.
… don’t forget about ESG
The evolution of the workplace is concurrent
+0.6%
pects of ESG will be a challenge. The focus will
be greatest in the environmental aspect, par-
ticularly as investment in new green buildings
increases. Furthermore, the EU has set out its
goals to become climate neutral by 2050 and a AVERAGE PRIME RENTAL GROWTH
55% reduction of greenhouse gas emissions by
IN EUROPE: 2022
2030. Buildings are responsible for about 40%
of the EU’s carbon footprint, which is why real

simple answer is change of use. Across Europe, we
have already seen examples of office space being
converted into residential space. In London, the
City of London Corporation has recently unveiled
with the ESG (Environmental, Social and Go-
vernance) revolution. ESG will be a key driver
of the long-term value of offices; however, with
a myriad of approaches being adopted for the
estate, particularly offices, will play a very im-
portant part in meeting the EU’s target.
According to the EU’s European Commission,
approximately 85% of the EU’s building stock
was built before 2001, with a large proportion
of it now non-compliant with the latest energy
efficiency goals. The Commission estimates that
around 35 million buildings across Europe will
need to be refurbished to become compliant.
The renovation rate is currently between 1-1.5%
p.a.; to achieve the EU’s goal this needs to range
between 2-3%. Moreover, the majority of buil-
dings that are not energy efficient will require
a fundamental refurbishment, which will be
highly dependent on the building’s design, age,
and its location. These factors might mean that
refurbishment is not possible in all cases.
Office deliveries across Europe will increase by
6% in 2021 according to our forecasts. The risk
here is that the stock being delivered will not
+6.36%
AVERAGE PRIME TOTAL RETURN
IN 2022
meet the green credentials required, which will
lead to further redevelopment in the medium to
long term. Although we project office deliveries
to ease in the following years, beyond the fore-
casting horizon we expect this to pick up again,
increasing the stock of prime, newly-refurbi-
shed, green buildings.
Although it remains to be seen how the office
market will develop over the coming month’s #,
offices will remain an integral part of working
life. The size, use and requirement of offices may
vary, but the need for them will remain.

14 EUROPEAN PROPERTY OUTLOOK H2 2021

RETAIL
D +50%
espite the acute challenges faced by the
retail sector over the pandemic, there
are reasons to be cautiously optimistic.
Lockdowns have been synonymous with
a move towards local consumption. With
NEARING THE BOTTOM a large part of the population still working
from home, this trend could endure if local bu-
sinesses can continue to offer customers the
more personalised experience that can come
with local shops.
In the wider retail sector, the situation remains
fragile due to the emergence of more trans-
missible variants and the slow vaccination
campaigns in some countries. However, as the
link between cases and severe illness begins
to break, restrictions could be eased, offering
some relief and allowing the sector to focus on
adapting to the post-COVID world.
A strong rebound of consumption
across Europe
One of the main challenges for the retail sector
during the health crisis was to entice consu-
OF EUROPEAN CONSUMERS
mers to physical stores. With all the implied PREFER LOCAL SHOPS
social interactions when visiting a retail unit,
13 (out of 24)
the required change in shopper behaviour
could have been disastrous for an already de-
celerating sector. However, retailers adapted
quickly and implemented new safety protocols.
On the other hand, the changes in broader sho- MARKETS HAVE SEEN
pping habits may also become permanent, par-
ticularly the rise of e-commerce, click-and-co-
PRIME YIELD DECOMPRESSION
llect sales and online grocery shopping. Those
+3.8%
segments of the population new to the conve-
niences of shopping online may continue to do
so, and might expand their online consumption.
Moreover, footfall levels remain very low, es-
AVERAGE PRIME TOTAL RETURN
pecially the prime luxury locations. These have OVER NEXT 5 YEARS
EUROPEAN PROPERTY OUTLOOK H2 2021 15
SECTOR PROSPECTS RETAIL

“ WE STILL HAVE REASON TO BE OPTIMISTIC FOR THE RETAIL SECTOR:

A STRONG LEVEL OF PENT-UP DEMAND, A MOVE TOWARD LOCAL CONSUMPTION
AND A SURGE OF CLICK-AND-COLLECT
“ been strongly impacted by travel restrictions,
even if some of the levels shown by Avenue des
Champs-Elysées in Paris in August 2020 or Old
Bond Street in London in December illustrated
the importance of domestic tourist and consu-
mers for these emblematic streets. With vacci-
nation programmes progressing and the gradual
reopening of European borders to international
With all these forces currently at play, much un-
certainty remains, for retailers and investors alike.

A slow recovery
Like hospitality, the retail sector could be one of
the slowest to recover. If international travel vo-
lumes are not expected to rise again before 2023,
Exhibit 13. MOBILITY & RETAIL SALES (%) tourists, we should expect the footfall of these retail sales in physical shops should continue to be
luxury prime streets to improve gradually. lower than their structural levels. That said, the
Retail sales – EU 27 Retail sales – UK
impact would be uneven. For example, shopping
20 Finally, some supply chain disruptions remain, centres and high street retail are likely to have the
15 a result of most factories being shut for a large strongest falls in values during the forecast period
10
part of 2020. At the peak of the crisis, some (2021-2025), with a quicker recovery for retail
countries feared a possible shortage of goods warehousing. The repricing for shopping centres
5
(such as pharmaceutical products or raw ma- should accelerate, especially for non-core assets,
0
terials for production). In addition, with the as the pandemic heightens obsolescence risks.
-5 closure of EU and national borders, countries
-10 have had to place restrictions on the export Prime rental values for high street units should
-15 and import of some goods. Poland, one of Eu- continue to fall until 2023 (-1.7% p.a. on average
-20 rope’s main logistics centres, decreased goods in Europe) and start to recover in 2024 and 2025
Jan FebGermany
Mar mobility
Apr May indexJun
(rhs) Jul AugFrance
Sep mobility
Oct Novindex Dec
(rhs) Jan Feb Mar Italy
Aprmobility
May index
Jun (rhs)
Jul flows at its borders during most of 2020, which (+2.2%) (Exhibit 14). However, rental values
United Kingdom mobility index (rhs) Spain mobility index (rhs)
20 2020 2021 negatively impacted the delivery pipeline. should remain below pre-pandemic levels for

-20

-40

-60

-80

-100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
2020 2021

Germany mobility index (rhs) France mobility index (rhs) Italy mobility index (rhs)
United Kingdom mobility index (rhs) Spain mobility index (rhs)
Source: BNP Paribas Real Estate
20

0
16 EUROPEAN PROPERTY OUTLOOK H2 2021
-20
 SECTOR PROSPECTS RETAIL

the majority of European markets. Some retail
markets’ rental values should settle significant-
ly below their pre-pandemic highs; for example,
-65% for Rome, -36% for Amsterdam and -30%
for London between 2017 and 2023. Prime lo-
cations are expected to suffer less from the CO-
VID-19 impact than secondary locations, where
a more notable value decline is anticipated. Pri-
me locations, having already faced other serious
events in the past (sovereign debt crises, terro-
rist attacks, strikes), are likely to demonstrate
their resilience in challenging circumstances.
Shopping centres will continue to see falling
rent, with -3.0% p.a. on average in Europe un-
til 2023. The rebound should also lag behind
high street retail, with +1.9% p.a. expected at
the end of the forecast period (2024/2025).
Non-core assets are seeing limited investor in-
terest, as such should suffer more.
“
OPPORTUNITIES SHOULD OCCUR IN THE SHORT AND MEDIUM TERMS,
AND STRONG LEVEL OF RETURN MAY STILL BE FOUND
The lack of investor confidence regarding future
income has already translated into yield move-
ments. In 2020, prime net initial yields in Euro-
pe increased by an average of 50bps and 60bps
for high street retail and shopping centres res-
pectively. We expect further decompression for
these two asset classes until 2023 (+20bps and
+30bps for high street and shopping centres,
respectively). However, investors are still confi-
dent in some economies where online shopping
is increasing, such as Germany and the Sou-
thern European markets. For these markets, we
are not predicting any increase in yields, and we
could even have some yield compression until
2023 in Madrid, Barcelona and Rome.
“ In this period of high uncertainty for retail in-
Retail investment: return to basics
We see both a rise in prime yields and conti-
nued fall in rental values; as such total returns
(Exhibit 15) will turn negative across Europe in
the short term (-3.0% in 2021). As the situation
improves over the medium term, we expect
strong total return at the end of the forecast
period. Spain (6.0%), Italy (5.6%) and Sweden
(4.5%) should experience the highest average
annual total returns for high street retail du-
ring the forecast period. Concerning shopping
centres, Sweden (5.5% p.a.), the Czech Republic
(4.9%), the UK (4.5%) and Ireland (4.2%) should
outperform the European average (3.7%).
vestors, the need for caution is strong. However,
positive and stable returns can still be found.
Targeted stock selection will be more important
than ever. Assets that are well located, close
to large metropolitan areas or in city centres,
should continue to attract consumers, retailers
and investors. Moreover, the growing interest
for local businesses may continue to boost
physical retail. Finally, ESG (Environmental,
Social and Governance) risks could also favour
physical shopping. Consumers are still attrac-
ted by the social interaction of the retail sector,
and questions around the environmental cost
of online deliveries (and of returns logistics)
could begin to slow the rise of online shopping
and provide opportunities for bricks-and-mor-
tar investors.

Exhibit 14. RENTAL VALUE EVOLUTION (INDEX, 2016 = 100) Exhibit 15. ANNUAL AVERAGE TOTAL RETURN (%, 2021-2025)
High Street – Europe excl. UK High Street – United Kingdom High Street Shopping Centre
Shopping Centre – Europe excl. UK Shopping Centre – United Kingdom
110 7

6
100
5
90
4
80
3
70 2

60 1

0
50
Sweden

Czech Rep

U.K.

Ireland

Germany

Netherlands

Spain

France

Italy
40
16 17 18 19 20 21 22 23 24 25
Source: BNP Paribas Real Estate Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 17

LOGISTICS
A SECTOR IN A BOOM PHASE:
THE WILLINGNESS TO INVEST
IN THIS SECTOR REMAINS HIGH
18 EUROPEAN PROPERTY OUTLOOK H2 2021
In a nutshell
Data for the first half of 2021, both in terms
of take-up (+28% compared to the same pe-
riod last year) and investment volume (+62%),
clearly shows that the logistics sector has
weathered the COVID-19 crisis better than
most other sectors of the market.
Even so, the European logistics market is in the
midst of a restructuring process. The pandemic
has highlighted and, in some cases, reinforced
the existing strengths and weaknesses of the
market. The blockage of the Suez Canal by the
container ship ‘Ever Given’ and numerous bor-
der closures have exposed vulnerabilities on
a global scale. The resulting return to more
nationally or regionally oriented production
(“reshoring”) is increasing European logistics
demand. However, e-commerce, which is still
gaining momentum, remains the main driver.
All this is reflected in rising rents, an increa-
sing shortage of space and growing investor
interest.
Occupiers, in turn, are being partly forced to
pay ever-higher rents. This is being aggravated
by competition from sectors that are able to
pay these new prime rents more easily due to
their higher margins. The highest rents are cu-
rrently still being achieved in London at €194/
sq.m. annually.
Due to limited stock alternatives, the internatio-
nal investor community is increasingly targeting
its investment strategy at the logistics market.
The market shares of offices and retail have al-
ready been reduced in favour of logistics. In our
opinion, the logistics asset class is unlikely to
peak for quite some time to come. Demand will
continue to be satisfied only to a limited extent
because the development pipeline cannot keep
pace with the excess demand. This will almost
inevitably lead to further yield compression.
Throughout 2021, we expect compression of
over 30bps in Europe.
Occupier markets:
Increase source of demand
E-commerce as a shopping channel was boos-
ted by the restrictions put in place during loc-
kdowns in most countries. Changing shopping
habits is therefore a structural demand driver
for warehousing space in Europe. In addition,
technological innovations, shifts in production
locations and growing e-commerce distribution
networks are all affecting the requirements for
warehousing space. Future industries such as
e-mobility are also keeping take-up at a high
level, and demand from these industries will
continue to grow in the coming years.

Take-up in France, Germany, the Netherlands,
Spain and the UK totalled 10 million square
metres in the first half of 2021, a new all-time
high. Compared to the first half of 2020, it is an
increase of 28%.
In most European cities, we expect take-up to
continue to rise until the end of 2021. In Düs-
seldorf, a high-performing example, the increa-
se compared to 2020 could be around 80%. This
is due to an exceptionally good first half-year
with large-scale lettings. Notably, Spanish
markets are at 20% growth compared to the
previous year. We expect this particular market
development to peak in 2022, after which take-
up could decrease slightly.
As logistics markets have experienced little
negative impact from the pandemic, it is not
surprising that rents are trending upwards. In
many major logistics regions, prime rents have
Exhibit 16. AVERAGE RENTAL GROWTH (%, P.A.)
3,0
2,5
2,0
1,5
1,0
0,5
0,0
2019 2020 2021
Source: BNP Paribas Real Estate
increased over the past 12 months. Based on
50 surveyed markets in 23 countries, rents rose
(3.1%) from Q2 2020 to Q2 2021.
Above inflation rental growth
Our forecast, which we prepare for 34 markets
in Europe, assumes average rental growth of
2.1% for 2021. The only outlier in this scenario
is Copenhagen, with growth of 12.5%. This in-
crease in rents is largely due to the low level of
stock and the low vacancy rate in the Copen-
hagen logistics sector. Potential new logistics
properties are absorbed almost immediately
after coming to market.
However, a large part of the market (just
under 60%) is predicted to have between 0%
and 2% growth. In 2022, this development
could stabilise; for European cities, we an-
ticipate growth of 2.2% on average. Over the
2022 2023 2024 2025
SECTOR PROSPECTS LOGISTICS
+14.2%
entire forecast period from 2021 to 2025, we
forecast average annual rental growth of
1.4%. In view of this positive outlook, a rental
price level of 84% above the 2012 level will
be reached by the end of 2025. For Europe TOTAL RETURN IN EUROPE IN 2021
excluding the UK, rents will more than dou-
+1.4% p.a.
ble (Exhibit 16).
Investment markets: Strong demand
Investment volume reached a high point in Q2 EXPECTED AVERAGE RENTAL GROWTH
2021. Compared to H1 2020, first-half invest-
ment volumes increased by 62%. The industrial IN EUROPE
and logistics market is still gaining market
+13%
share over retail and offices, with volume share
rising from 14% to 23% of total commercial real
estate investment over the year.
The current average gap in net prime yields GROWTH OF ONLINE SALES
between offices and warehouses in Europe is
only 65bps. However, this value varies consi- ACROSS EUROPE IN 2020
EUROPEAN PROPERTY OUTLOOK H2 2021 19
SECTOR PROSPECTS LOGISTICS

derably between individual countries. It ran-

ges from 15bps in the Netherlands to 155bps
in Italy.

We anticipate continued dynamic develop-

ment in the logistics investment market over
the next few years and see the lowest prime
yields (3.0%) in Europe being achieved in Ne-
(Poland) and West Brabant (Netherlands) (Ex-
hibit 17). For other European cities, we fore-
cast an average decline in net prime yields of
20bps. The forecast values vary considerably.
In the UK, for example, we anticipate only sta-
ble yields.

Over the entire forecast period, the average an-

“ INVESTMENT, BUT ALSO DEVELOPING

2021, it is only 6.7% for offices and negative,

“
E-COMMERCE AND RE-SHORING ARE THE (FUTURE) MAIN DRIVERS
ON THE DEMAND SIDE. FALLING YIELDS SHOULD NOT ONLY ENCOURAGE

Hidden champions in Europe

therlands.
As predicted, the short-term forecast until the
end of 2021 does not show a uniform picture
for the individual markets. While a compres-
sion of 27bps is forecast for the cities in the
Eurozone, we expect a decline of 32bps for Eu-
ropean cities as a whole. Due to product shor-
tages and the good to very good development
opportunities for warehouses and production
facilities, we even expect yield compression of
at least 75bps in Copenhagen, Warsaw, Poznan
nual compression of prime yields in European
cities is 7bps. The years 2021 and 2022, in par-
ticular, show the greatest momentum, while
we assume only very slight declines or stable
yields in the following years.
Expect relatively strong returns
Due to the increasing rents and falling prime
yields, the logistics sector has higher total
returns compared to offices and retail. While
logistics has a double-digit value of 14.2% for
at -3.0%, for retail. Over the entire forecast pe-
riod, the picture is similarly positive: an annual
average of 7.4% for logistics compared to 6.0%
for offices and 3.8% for retail in European cities.
The variation between cities is high. Prime total
returns in 2021 range from 6.2% in the UK’s
Midlands to 37.9% in Poznan. One-third of Eu-
ropean cities achieve average annual total re-
turns of more than 8% over the entire forecast
period (Exhibit 18).
Centrally located countries, in particular, are
benefitting from the more intensive domes-
tic trade on the European continent. From an
investor point of view, there are now nume-
rous attractive logistics markets in Europe,
with stable economic and political conditions
and rising demand for space. For Prague, for
example, we expect rental growth of over 10%
and yield compression of 25bps over the next
two years.

Exhibit 17. EXPECTED YIELD SHIFT (END 2020 – END 2025, BPS) Exhibit 18. AVERAGE TOTAL RETURN BY REGION (%, P.A.)
2019 2020 5yr Average
Warsaw
Lisbon 25,0

Stockholm
20,0
Madrid
Greater Paris
15,0
Milan
Amsterdam
10,0
Hamburg
Venlo
5,0
South East
Oslo
0,0
-1,40 -1,20 -1,00 -0,80 -0,60 -0,40 -0,20 0,00 0,20 0,40 0,60 CEE Southern Europe Nordics France Benelux Germany UK
Source: BNP Paribas Real Estate Source: BNP Paribas Real Estate

20 EUROPEAN PROPERTY OUTLOOK H2 2021

 SECTOR PROSPECTS RESIDENTIAL

RESIDENTIAL A deeper private rental market inflation (Exhibit 19). Over the last six years, in Germany. In Finland, Sweden and the UK,
rents rose by more than 40% in Spain and Ire- rents increased a more moderate 10% to 20%,
Tenants now account for 30.2% of Europe’s hou- land, and approximately 30% in Italy and 25% while remaining generally steady in France.
seholds versus 29.3% back to 2010. However,
the proportion of households in the rental sector
FROM NICHE is considerably heterogeneous across the region.
Exhibit 19: 6 YEARS CHANGE IN HOUSING RENTS IN EUROPE (INDEX, 2015=100)
TO MAINSTREAM Switzerland (58.4%) and Germany (48.9%) ac-
count for the largest tenant proportions in Eu-
Finland France Germany Ireland Italy Spain Sweden United Kingdom
rope. Historically, Southern and Eastern Europe
have a high homeownership rate. Nevertheless, 160
we are observing a shift, with some countries
150
experiencing a rise in their tenancy rate. During
the last decade, tenant households increased 140
by 3.3% in Lithuania and Slovenia, 3.6% in Spain 130
and 3.8% in Estonia, and each still has room to
grow compared to the EU average. 120

110
Temporary adjustment in rents
100

Between 2015 and 2021, housing rents in Euro- 90

pe increased at different speeds, outperforming 2015 2016 2017 2018 2019 2020 2021
Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 21

SECTOR PROSPECTS RESIDENTIAL

“ DEMAND FOR HOUSING IS SHIFTING

MORE TOWARDS THE OUTSKIRTS OF
LARGE AND MEDIUM CITIES.
“
In 2020, we witnessed an excess supply of rental
in line with low mortgage rates and the improve-
ment in household confidence. Hence, the finan-
cing market will remain strongly favourable, con-
tributing to the rise of housing prices in Europe.

Shift in housing demand

The exceptional credit standards and low mort-
Exhibit 20. HOUSE PRICE GROWTH (%,Y/Y): Q1 2021 vs Q1 2020

ICELAND
+8.6
EUROPE
+6.1
Q1 2021 vs Q1 2020
NORWAY
+9.7

DENMARK FINLAND
housing. The pandemic prevented tourism, which, gage rates continue to drive housing prices up to +15.0 +3.6
in turn, forced owners of short-term furnished a historical high level. In Q1 2021, prices increa-
housing to put their properties into the long- sed by 6.1% year-on-year in the European Union. UNITED
term rental market. Moreover, demand for sha- Turkey (+32%), Luxembourg (+17%), Denmark KINGDOM
red accommodation, from international and local (+15.3%), Lithuania (+12%) and the Czech Repu- +9.0
students, dropped dramatically with the need for blic (+11.9%) recorded the highest increases in SWEDEN
distance learning. Hence, we saw a slowdown in Europe, all with growth greater than 10%. In con- +7.2
the upward dynamics in Germany and Ireland, trast, Spain, Romania, Italy, Slovakia, Latvia, Ire- IRELAND NETHERLANDS
while rents started to decrease in Q4 2020 for land and Finland posted the lowest housing price +3.1 +11.0
Spain and Italy and Q1 2021 for Finland. growth in a range of 0.9% to 3.6% (Exhibit 20).

However, the adjustment in rents should be Lockdowns, health restrictions and homewor- BELGIUM GERMANY POLAND
temporary. We expect a normalisation at the king developments have completely changed +6.7 +9.4 +7.2 CZECH
end of 2021, with a rebound in tourism and housing demand. Even if urbanisation rates REPUBLIC
conferences once vaccination programmes are are still growing in Europe, housing demand +12.0
more complete. Moreover, face-to-face lessons has shifted towards the outskirts of large cities SLOVAKIA
should see students starting to, gradually, re- and medium cities that offer natural amenities. PORTUGAL +2.0
turn to residences in September. Furthermore, demand is now stronger for lar- +5.2 FRANCE
ger dwellings, to gain dedicated space for ho- +5.5 ROMANIA
Exceptional conditions in the credit meworking, and oriented to newer dwellings +1.4
HUNGARY
market offering shared spaces, a private balcony or a
terrace. We expect homeworking to remain a +4.6
Despite very low mortgage rates in Europe, com- feature of working life balance going forward,
SPAIN AUSTRIA
mercial banks adopted a cautious attitude in even if at a reduced rate. As a result, the shift in +8.3
2020, tightening credit standards due to the rise housing demand should stay. +0.9
BULGARIA
in risk perception. In 2021, credit conditions have +7.8
ITALY
loosened thanks to the expected rebound of the A ‘boiling’ residential investment market +1.7
economy, the decline in risk perception and in- TURKEY
creased competition in the credit market. Loan In 2020 the European real estate investment +32.0
demand is still registering high levels, which is market declined by 14% year-on-year due to
Source: Eurostat

22 EUROPEAN PROPERTY OUTLOOK H2 2021


the uncertain environment caused by the global
health crisis. However, the share of the residen-
tial market reached 21% (from 16% in 2019). The
overall level of residential investment reached
nearly €65 billion in 2020 (+12.4%), evidence of
the strong and growing institutional appetite
for the asset class. Moreover, according to the
latest Investor Intentions Survey conducted by
INREV, allocations for real estate will be higher
in the coming years – 10% in 2021 against 9.3%
in 2020. The survey further shows that 84% of
investors consider residential as the preferred
asset for their capital, up from 80% in 2020 and
on par with the logistics and office sectors. Ger-
many, France and the United Kingdom, in this
order, are the most preferred countries. Mo-
reover, while investors would adopt mainly a
core strategy, they would strongly consider va-
lue-added strategies. We expect residential to
reach 25% of total European investment volume
Exhibit 21: RISK-RETURN PROFILE BY ASSET CLASS
16,0%
14,0%
12,0%
Total return 2015-2020
Residential
10,0%
8,0%
6,0%
4,0%
10Y bond yields
2,0%
0,0%
0% 1%
Source: Eurostat
“
OVER THE LAST FIVE YEARS, RESIDENTIAL MARKET HAS PRESENTED AN ATTRACTIVE
RISK-ADJUSTED RETURN COMPARED TO OTHER REAL ESTATE ASSET CLASSES.
over the medium term. Yields is also expected
to compress over the next quarters.
Outperforming investment
and economic indicators
The European residential market is becoming in-
creasingly attractive compared to other markets.
Indeed, the residential risk premium is 190bps
above its long-term average. Office and resi-
dential yields have compressed dramatically
during the last decade, with the historic spread
between the yields being approximately 110bps;
it was 60bps in 2020. During the last five years,
residential in Europe has presented a very at-
Industrial
Office
Hotel
Retail
2% 3% 4% 5% 6%
Total return volatility 2015-2020
SECTOR PROSPECTS RESIDENTIAL
“ 110bps
SPREAD OVER LONG TERM
tractive risk-return profile compared to other AVERAGE YIELDS
asset classes (Exhibit 21). Moreover, residential
+60bps
assets have proven to be more resilient than
other real estate assets during economic down-
turns due to the lower correlation to business
cycles. They now have a rent collection expecta-
tion of 100% according to INREV, the highest rate
alongside logistics, student accommodation and
AVERAGE SPREAD BETWEEN
senior housing. The utility value of residential RESIDENTIAL AND OFFICE YIELDS
assets has also increased because of the pande-
+8.8%
mic. Housing has not just been a home and re-
fuge for families but also a place of work. Finally,
the European residential market is experiencing
an increasing level of tenure, which is helping to
increase its market depth.
5YR RISK ADJUSTED RETURNS
EUROPEAN PROPERTY OUTLOOK H2 2021 23
APPENDIX

24 EUROPEAN PROPERTY OUTLOOK H2 2021

EUROPEAN OFFICE MARKET OVERVIEW (5yr average, 2021-2025, % p.a.) APPENDIX
AVERAGE OFFICE MARKET PRIME OFFICE
Rental Growth Income Return Capital Growth Total Return Rental Growth Income Return Capital Growth Total Return
Vienna -0.58 4.76 0.42 5.18 1.90 2.90 3.30 6.20
Berlin 3.60 3.15 2.48 5.63 3.70 2.40 5.00 7.40
Cologne 2.50 3.65 2.54 6.19 2.90 2.80 4.00 6.80
Dusseldorf 3.30 3.65 1.94 5.59 1.70 2.80 2.40 5.20
Frankfurt 2.60 3.45 1.84 5.29 1.50 2.70 2.20 4.90
Hamburg 3.60 3.30 2.29 5.59 2.10 2.50 3.30 5.80
Munich 2.80 3.25 1.87 5.12 2.20 2.50 3.00 5.50
Stuttgart 1.88 3.65 1.47 5.12 2.30 2.80 3.00 5.80
Greater Paris 0.66 4.24 0.58 4.82 1.10 2.50 2.70 5.20
Central Paris 0.72 4.19 0.82 5.01 1.10 2.50 2.70 5.20
Paris – CBD 1.06 3.20 2.25 5.45 1.10 2.50 2.70 5.20
La Defense 0.10 4.95 0.23 5.18 -0.70 4.10 -0.70 7.00
Lyon 0.66 4.73 1.34 6.07 1.50 3.30 3.30 6.60
Marseille 1.08 5.24 0.99 6.23 1.10 4.10 2.10 6.30
Lille 0.37 5.24 0.51 5.75 0.80 4.10 1.10 5.20
Bordeaux 1.00 5.20 1.94 7.14 0.70 4.20 2.80 3.40
London – Central 1.70 4.79 0.48 5.27 2.30 3.20 4.20 7.40
London – City 0.79 4.84 0.11 4.95 2.10 3.70 4.00 7.70
London – Midtown 1.26 4.49 0.26 4.75 1.30 3.80 1.60 5.40
London – West End 2.17 4.49 0.73 5.22 2.30 3.20 4.20 7.40
Birmingham -1.72 6.98 -0.29 6.69 1.30 4.70 2.00 6.60
Bristol -1.18 6.97 0.64 7.61 1.00 4.80 1.40 6.30
Manchester -0.86 6.67 0.50 7.17 2.60 4.70 3.40 8.10
Edinburgh -0.78 7.23 0.96 8.20 1.00 4.80 1.20 6.00
Dublin -1.72 5.05 -0.05 5.00 1.00 4.00 0.80 4.80
Copenhagen 0.68 4.67 0.54 5.21 0.70 3.40 1.90 5.30
Helsinki 0.21 4.30 1.31 5.61 1.30 3.10 3.30 6.40
Stockholm 2.80 3.57 4.02 7.59 2.70 3.00 5.50 8.50
Oslo 1.80 4.71 -0.22 4.49 1.60 3.20 2.60 5.70
Prague -1.80 5.13 -0.48 4.65 0.90 4.20 1.40 5.60
Budapest -1.42 7.26 -1.48 5.78 0.10 5.70 0.60 6.40
Warsaw -2.00 4.70 -0.98 3.72 0.30 4.60 0.80 5.40
Bucharest N/A N/A N/A N/A -0.60 6.90 -0.30 6.60
Milan -2.36 5.05 -0.49 4.56 0.70 3.00 2.00 5.00
Rome -1.64 6.42 -0.59 5.83 0.40 3.80 1.50 5.30
Lisbon -2.50 6.35 -1.10 5.25 0.10 3.90 2.30 6.20
Madrid -2.06 5.86 -1.08 4.78 -0.40 3.50 0.20 3.70
Barcelona -1.36 6.20 -1.01 5.19 -0.30 3.50 0.30 3.70
Brussels -2.80 5.05 -1.21 3.84 0.30 3.60 2.00 5.60
Amsterdam -1.37 4.06 -1.00 3.06 0.40 3.00 2.20 5.10
Weighted European Average 0.15 4.25 0.94 5.19 1.20 2.90 3.00 6.00
Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 25

APPENDIX

EUROPEAN RETAIL MARKET OVERVIEW (5yr average, 2021-2025, % p.a.)

PRIME HIGH STREET RETAIL PRIME SHOPPING CENTRE
Rental Growth Income Return Capital Growth Total Return Rental Growth Income Return Capital Growth Total Return
Vienna 0.15 3.31 0.17 3.48 Germany -0.86 4.84 -1.01 3.83
Berlin 1.15 2.80 1.15 3.95 France -0.99 4.52 -1.53 2.99
Cologne 0.82 3.30 0.82 4.12 U.K. -1.41 7.66 -2.74 4.92
Frankfurt -0.34 3.10 -0.34 2.76 Ireland -1.98 5.40 -0.71 4.69
Hamburg -0.37 3.00 -0.37 2.63 Sweden 0.72 5.02 0.54 5.56
Munich 0.63 2.80 0.63 3.43 Czech Republic 0.66 5.58 -0.60 4.98
Stuttgart 0.89 3.20 0.89 4.09 Italy -2.28 6.40 -3.77 2.63
Dusseldorf -1.05 3.20 -1.05 2.15 Spain -2.30 5.57 -2.25 3.32
Greater Paris -2.71 3.16 -0.81 2.35 Netherlands -1.00 5.71 -2.31 3.40
London – Central -1.10 3.72 -2,02 1.70 Weighted Europeean Average -1.05 5.63 -1.60 4.04
Birmingham -0.82 7.16 -2,31 4.85
Manchester -1.06 7.28 -2,92 4.36 Source: BNP Paribas Real Estate

Glasgow -1.56 7.30 -3,37 3.93

Dublin -1.71 4.40 -0.38 4.02
Oslo 0.90 4.45 -0.21 4.24
Copenhagen -0.63 3.95 -3.17 0.78
Helsinki 1.20 4.39 0.05 4.44
Stockholm 0.66 3.60 0.96 4.56
Prague -0.49 4.34 -0.94 3.40
Milan 1.62 3.40 2.26 5.66
Rome 1.40 3.67 1.68 5.35
Madrid 0.08 3.50 1.46 4.96
Barcelona -0.15 3.50 1.21 4.71
Amsterdam -1.43 4.05 -2.53 1.52
Weighted European Average -0.15 4.03 -0.40 3,65
Source: BNP Paribas Real Estate

26 EUROPEAN PROPERTY MARKET OUTLOOK H1 2020

 APPENDIX

EUROPEAN LOGISTICS MARKET OVERVIEW (5yr average, 2021-2025, % p.a.)

PRIME LOGISTICS
Rental Growth Income Return Capital Growth Total Return
Vienna 0.80 3.90 3.90 7.80
Berlin 1.40 3.10 2.90 6.10
Ruhr Area 1.40 3.10 3.00 6.10
Dusseldorf 1.30 3.10 2.90 6.00
Frankfurt 1.10 3.10 2.70 5.80
Hamburg 1.70 3.10 3.30 6.40
Munich 1.80 3.10 3.40 6.50
Greater Paris 0.70 3.40 3.90 7.30
Lyon 0.80 3.40 4.00 7.40
Marseille 0.80 3.40 4.00 7.40
Lille 0.00 3.40 3.20 6.60
London – Heathrow 3.50 3.30 5.10 8.40
South East 1.60 4.00 0.30 4.20
Midlands 2.10 3.80 1.60 5.40
North West 2.60 3.80 2.10 5.90
Oslo 2.00 4.80 -0.10 4.70
Copenhagen 4.00 4.70 6.20 10.90
Helsinki 1.20 4.20 1.20 5.40
Stockholm 1.60 4.00 5.10 9.10
Poznan 0.60 4.80 6.30 11.20
Warsaw 0.60 4.60 5.80 10.40
Bucharest 0.50 7.90 0.90 8.80
Prague 2.10 4.70 3.70 8.30
Budapest 2.00 7.10 2.70 9.80
Milan 1.10 4.50 3.30 7.80
Lisbon 1.20 5.60 3.30 8.90
Madrid 1.30 4.10 3.90 8.10
Barcelona 1.40 4.10 4.10 8.20
Valencia 0.70 5.70 1.80 7.50
Brussels 1.70 4.70 2.30 7.10
Amsterdam 1.20 4.30 2.60 7.00
Rotterdam 0.70 4.00 2.30 6.30
Venlo 0.80 3.60 1.60 5.20
West Brabant 0.70 3.50 6.60 10.10
Weighted European Average 1.40 4.20 3.20 7.40
Source: BNP Paribas Real Estate

EUROPEAN PROPERTY OUTLOOK H2 2021 27

 INTERNATIONAL RESEARCH

Richard MALLE Samuel DUAH Stephen ACKROYD Sukhdeep DHILLON

GLOBAL HEAD OF RESEARCH HEAD OF REAL ESTATE ECONOMICS SENIOR ANALYST – UK EUROPEAN ECONOMIST – UK & I, NORDICS
Tel: + 33 1 47 59 17 37 Tel: +44 207 338 42 07 Tel: +44 207 338 4328 Tel: +44 207 338 4834
richard.malle@bnpparibas.com samuel.duah@bnpparibas.com stephen.ackroyd@bnpparibas.com sukhdeep.dhillon@bnpparibas.com

Alexis POURCELOT Thomas GLUP Benoit LEFEBVRE

EUROPEAN ECONOMIST ECONOMIST – GERMANY EUROPEAN ECONOMIST – FRANCE
– ALTERNATIVE MARKETS Tel: +49 30 348 48 408 Tel: +44 207 338 4257
Tel: +34 649 874 624 thomas.glup@bnpparibas.com benoit.l.lefebvre@bnpparibas.com
alexis.pourcelot@realestate.bnpparibas

LOCAL RESEARCH

GERMANY IRELAND SPAIN UNITED KINGDOM

Wolfgang SCHNEIDER Kate RYAN David ALONSO-FADRIQUE Stephanie MCMAHON
HEAD OF RESEARCH HEAD OF RESEARCH HEAD OF RESEARCH HEAD OF RESEARCH
Tel: + 49 40 34848102 Tel: + 353 1 661 1233 Tel: + 34 914 54 99 80 Tel: + 44 20 7338 4002
wolfgang.schneider@bnpparibas.com kate.ryan@bnpparibas.com david.alonso-fadrique@bnpparibas.com stephanie.mcmahon@bnpparibas.com

FRANCE BELGIUM & LUXEMBURG NETHERLANDS

Guillaume JOLY Pascal MIKSE Dirk DEN HOLLANDER
HEAD OF RESEARCH HEAD OF RESEARCH HEAD OF RESEARCH
Tel: + 33 1 47 59 22 13 Tel: + 32 2 290 59 23 Tel: + 31 6 15 64 67 20
guillaume.joly@bnpparibas.com pascal.mikse@bnpparibas.com dirk.den-hollander@bnpparibas.com

CZECH REPUBLIC ITALY POLAND

Kamila BREEN Cristiana ZANZOTTERA Małgorzata FIBAKIEWICZ
HEAD OF RESEARCH HEAD OF RESEARCH HEAD OF RESEARCH
Tel: +420 224 835 010 Tel: + 39 232 115 357 Tel: + 48 608 650 045
kamila.breen@bnpparibas.com cristiana.zanzottera@bnpparibas.com malgorzata.fibakiewicz@bnpparibas.com

28 EUROPEAN PROPERTY OUTLOOK H2 2021

 L O C AT I O N S
(July 2021)

EUROPE BELGIUM ITALY POLAND MIDDLE EAST / ASIA

FRANCE
Headquarters
167, quai de la Bataille de Stalingrad
92867 Issy-les-Moulineaux
Tel.: +33 1 55 65 20 04
GERMANY
Goetheplatz 4
60311 Frankfurt am Main
Tel.: +49 69 29 89 90
UNITED KINGDOM
5 Aldermanbury Square
London EC2V 7BP
Tel.: +44 20 7338 4000
Avenue Louise 235
1050 Brussels
Tel.: +32 2 290 59 59
SPAIN
C/ Emilio Vargas, 4
28043 Madrid
10, rue Edward-Steichen
Tel.: +34 91 454 96 00
IRELAND
Investment Management
57 Adelaide Road,
Dublin 2
Tel.: +353 1 66 11 233
Piazza Lina Bo Bardi, 3
20124 Milano
Tel.: +39 02 58 33 141
LUXEMBOURG
Kronos building
Avenida da República, 90 Piso 1,
2540 Luxembourg
Tel.: +352 34 94 84
Tel.: +352 26 06 06
NETHERLANDS
Antonio Vivaldistraat 54
1083 HP Amsterdam
Tel.: +31 20 305 97 20
DUBAI
Prime Corporate Center
Grzybowska 78
00-844 Warsaw Emaar Square
Tel.: +48 22 653 44 00 Building n° 1, 7th Floor
PORTUGAL
P.O. Box 7233, Dubaï
Tel.: +971 44 248 277
HONG KONG, SAR CHINA
Fracção 1
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Tel.: +35 1 939 911 125 Finance Centre
CZECH REPUBLIC
8 Finance Street, Central,
Hong Kong, SAR China
Ovocny trh 8, 2nd Floor
Tel.: +852 2909 8888
110 00 Prague 1
SINGAPORE
Tel.: +420 224 835 010
20 Collyer Quay, #17-04
Singapore 049319
Tel.: +65 681 982 82

ALLIANCES
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SWEDEN I SWITZERLAND I USA

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30 EUROPEAN PROPERTY OUTLOOK H2 2021