2021 EMEA Real Estate Market Outlook

Key Takeaways: Economy

• Near-term weakness but a robust recovery in 2021, especially the second half

• Robust growth in 2021 following the availability of a vaccine 
• Risks still tilted to the downside 
• Country differences caused by a combination of policy and industry mix

• Lower-for-even-longer interest rate environment

• Low inflation - both current and expected - and significant asset purchases mean lower for longer interest rate environment
• Short-term interest rates not expected to rise until 2023
• Debt servicing is comfortable and debt sustainability is not a near‑term risk
• Attractive property spreads on the risk-free rate will continue to drive interest in real assets, including real estate

Key Takeaways: Investment

• Gradual recovery expected as CBRE is forecasting investment volumes to grow by about 8.5% in 2021, and a return to pre-COVID norms by H2 2022

• As general uncertainty in the market subsides and travel restrictions are lifted, investors will return to investment markets
• Investor appetite for logistics, multifamily and prime office assets, especially in major markets, should continue through 2021
• Distressed sales in hotel and secondary retail assets will likely materialise in the near term
• As market floors are formed across non-prime sectors, equity investors will be well-positioned to capitalise on discounts 
  

Key Takeaways: Offices

• Investors

• Assess good secondary assets in strong locations that may be capable of repositioning or upgrade, as yields look to be drifting out
• Core well-let long-income assets offer greatest protection against downturn, but few bargains
• Flexible space providers will need to raise the focus on wellness and hygiene in their offer. This is becoming a greater point of difference in selection decisions
• Still a growth sector over typical hold periods, but pricing of short-term risks needs attention
  
  
  

• Occupiers

• Weaker markets offer opportunity for more aggressive lease negotiation, particularly in non-prime space
• Opportunities for regears to lock into lower pre-recovery rent rolls 
• Rigorous evaluation needed of cost and productivity impacts of different fixed v remote work combinations
• Consolidation strategies to focus on core buildings: smaller but better

Key Takeaways: Retail

Opportunities exist in:

• Grocery sector

• Due to combination of long leases and more predictable property income 
  
  

• Retail parks

• Focus on convenience, catchment relevant
• No need for public transport
• Often grocery anchored

• Exceptional retail assets

• Curiosity and demand around the best locations and centres in Europe remain, but discounts are sought by incoming investors
  
  
  

• Retail property repurposing and repositioning

• The recalibration of rents, and retail property values, will provide opportunities for new ownership and in some cases opportunities for repositioning and repurposing
  
  
  

Key Takeaways: Logistics

Key Takeaways: Hotels

Hotel revenues and profit to remain under pressure through 2021 – rent and debt payments, for example, will continue to be a challenge for operators and owners. New supply will weigh on short-term performance recovery in some European markets.

Looking further ahead, less new supply, greater operational efficiencies and robust underlying demand will support strong income generation.

Greater alignment of buyer and seller expectations is anticipated to lead to more deal flow in 2021. Private equity and family offices will be particularly acquisitive. 

• Real estate and operational businesses must work together. They have complementary skills to support and enhance the performance of each other. In partnership, they are better equipped to:

• Accelerate innovation
• Deal with distress
• Recapitalise businesses
  
  
  

• Stakeholders must formulate and implement a plan in order to navigate the short-term challenges and capitalise on the recovery. This should consider opportunities for:

• Increased customer focus
• Cost reduction
• Consolidation
• Repositioning/Capex
  
  
  

Key Takeaways: Beds

The sector will undoubtedly face challenges in 2021, particularly as government support for jobs may taper. However, its proven resilience relative to other real estate sectors means multifamily will expand as investors diversify and new entrants come forward. Structural shortages prevail and will keep fundamentals generally sound.

The outlook for student accommodation is also strong but perhaps more cautious in the short-term compared with the other beds sectors, and operators will continue to face occupancy, cost and income pressures in the 2020/21 academic year.

On balance, although the outlook for rents is more subdued than in previous years, a highly competitive market will maintain pricing. This has already been demonstrated, as deals that finalised after restrictions were initially eased were agreed at pre-lockdown prices. 

• The continuing impact of the pandemic will require an even greater focus on the tenant, operational efficiencies and incorporating flexible space into new development. This will:

• Enhance communities and maintain occupancy
• Boost lease-up rates
• Maintain income and improve cost efficiency
  
  
  

• There is an opportunity for private investors to diversify the location of portfolios and deliver single-family and affordable/social housing to:

• Capitalise on emerging trends 
• Address the undersupply of social housing
• Create a more defensive and diversified income stream

Key Takeaways: Data Centres

High demand has encouraged data centre build and buy investments, and this trend will continue through 2021.

• Think ahead of the curve when it comes to new data centre locations.

• There are fewer options in existing markets, and they often come at a higher cost
• Look at where cloud deals are being signed – this is an indicator of where leased data centre customers are likely to need additional or future supply
• Pay attention to government initiatives that involve the sector that could influence your ability to land and expand in a market
  
  
  

• There is appetite for investing in the data centres sector across all major European markets in 2020.

• Data centre providers are willing to be innovative when it comes to identifying sites for new supply. We have seen investments in car show rooms, logistics sites, and multifamily and retail land parcels and green space for data centre developments
• Understanding of power requirements and connectivity is vital when marketing properties to this market

Key Takeaways: Operational Real Estate

Operational real estate classes rely on the sustainability of operators’ business models and the physical assets within which those operators generate cashflow. The COVID-19 pandemic has presented major challenges to almost all operational real estate sectors, and demanded a range of responses both corporately and on the ground. These will continue to dominate decision-making going into 2021.

We identify two broad categories:

• Leisure and entertainment sectors will likely remain disrupted for the foreseeable future. Operators should seek the fullest access to support measures including government job protection schemes and related subsidies, and any rent concessions that can be agreed with landlords. Despite this, two specific areas within this category – health and fitness and holiday parks – offer investment opportunities arising from growth and consolidation.
• The more defensive parts of the sector – mainly different types of healthcare, but also self-storage – have generally performed much better and will enter 2021 with their established long-term trajectories largely intact. In several of these areas there are opportunities related to M&A platform sales and cross‑border acquisitions as major operators look to establish genuinely pan‑national capabilities. Institutional investors will remain key to this process, and pricing looks likely to remain competitive.
  
  
  

As in the hotels market, it is important that real estate and operational businesses collaborate. Whether navigating short-term difficulties or expansion plans for the recovery, the input of the full range of stakeholders is most likely to optimise the outcome.