EMEA Sector Outlook

European GDP Forecasts 

• European economies have contracted sharply in H1 as lockdown measures aimed at combatting the COVID-19 outbreak have severely limited economic activity. With restrictions being lifted we are optimistic that we have passed the low point, and that a gradual recovery will ensue in H2 conditional on our ability to resume economic activity while minimising the spread of the COVID-19 virus.  
• In times of excessive economic volatility, official data is of limited use due to lags in its production. Survey data, however, such as the PMI’s – although difficult to interpret – point to a strong bounce back in activity in June and support the view that we may now be on a path of gradual recovery. 
• The relative size of the hit by country will depend on factors such as the severity of the restrictions imposed, how long they were in force and the importance of tourism and leisure to the different economies. 
• The immediate labour market impact in Europe is being constrained by a variety of wage subsidy, furlough and short time working policies. These will mean that the rise in unemployment will be far less than in the USA. To some extent, this is a definitional difference, but it will still help European consumers return to normality when restrictions are lifted. 
• The extent of current bond yield spreads between countries like Italy, in particular, and Spain on the one hand and Germany and the Netherlands on the other is, however, creating worries over funding debt service costs which is fermenting divisions between euro area countries. Expanded QE by the ECB, however, has prevented a major widening of spreads in government bond yields so far and they may even start to come in.  
• The new European Recovery Plan will provide fiscal support to southern European countries and fiscal measures in northern member states will also have spill-over benefits for the southern Euro Area members. 
• There are downside risks. If COVID-19 lockdowns have had a lasting impact on the confidence and balance sheets of consumers and businesses, in such a way that we see second and third round effects, it is entirely plausible that a V-shaped recession could turn into a U or L-shaped recession. 

Investment Market

• Despite the best Q1on record in Europe, market sentiment has deteriorated sharply since the end of March. 
• Preliminary data suggests a 61% drop in April/May aggregate investment volume compared to the same period last year. 
• While several deals transacted at over 100 million euros were closed in Q2, the vast majority were initiated in prior quarters.  Of these deals, we observed approximately an even split between domestic and foreign investment.  
• Preliminary data suggests that Multifamily investment has taken over Office in investment volume as investors consider the sector to be countercyclical.  Time will tell as to whether this is just a temporary shift or a lasting structural change. 
• As we emerge from the COVID-19 crisis, the Logistics and Residential sectors are looking the most resilient. Hotel and Retail sectors are expected to have a longer-term recovery shape. 
• Core markets are still active, while Value-Add investors are waiting for repricing and / or better access to debt.  In some markets, repricing in value-add strategies has already started to take shape. 
• We remain cautiously optimistic that investment reached its low point in May and will slowly start to improve from June onwards. 

Debt Market

• The debt market, which paused during European lockdowns, is showing signs of re-opening as underwriting started to look possible in June.   
• All-equity buyers still likely to be winners in this environment. 
• The cost of borrowing has increased slightly, with the majority of those internally surveyed observing a 0-50 bps increase. 
• Furthermore, a third of all survey respondents observed an increase of above 50 bps. 
  

Valuation

• Some notable shifts between Q1 and Q2 reported yields, predominately in the Retail and Hotel sectors, have now been observed. 
• In the Retail sector, we have seen yield softening generally of around 25 bps since Q4 2019.  In some cases, yields have even softened by more than 100 bps. 
• In the Hotel sector, several locations have seen softening of 25-50 bps since Q4 2019.  
• While cap rates have been expected to expand, notably in the Retail and Hotel sectors, there has been limited market evidence to date. 
• Pricing in the Prime Office sector has held constant from pre-COVID with some variation in secondary locations. 
• There have been no signs of distress selling yet. However, summer may provide more guidance as open-ended funds, which have seen an increased call for redemptions may trigger sales.

Investment in European real estate from 2006 to 2020


Source: CBRE Research 2020.

Research contact: Pierre-Edouard Boudot
Business contact: Chris Brett

• Q1 take-up numbers show the beginnings of much weaker period for leasing activity: 
  • For the major European markets combined, Q1 take-up is around 19% lower than Q1 2019; last four quarters vs previous four is down around 4.6%. 
  • In Paris take-up declined by 11% Q1 2020 versus Q1 2019; in Germany the top-4 markets showed declines of 10% to 38% for the same period and central London declined by 12%; CEE is much more mixed picture (eg Warsaw only marginally down Q on Q and Moscow up). 
    
• Looking forward, new requirements and searches are much weaker, especially for small units.  This will clearly dent leasing activity later in the year.  In the EMEA flash survey over 80% of companies reported some negative impact on leasing decisions from the lockdown. 
• Vacancy rate rose in Q1, reversing the downwards trend of previous years, but this is not yet the case in all markets: vacancy rose in Q1 in Paris, Berlin and London, but fell further in Amsterdam, Warsaw, Milan and Frankfurt.  We expect more general rises in vacancy as demand weakens further in Q2. 
• Impact on rents is so far limited but will become more pronounced as the year goes on.  Q1 data shows prime rents mostly flat QonQ.  Rates of rental growth were easing even before lockdowns were introduced, and the downturn will accelerate this process and pitch many into negative territory this year. 
• Some occupiers are seeking temporary rent relief, and landlord responses will be critical to viability of some in-place leases.  EMEA flash survey shows that over 50% of occupiers have sought some form of rent relief but with limited success. 
• Occupiers at varying stages of planning and managing return-to-work strategies as lockdown measures are loosened, as well as longer-term aspects of their CRE activities (location strategy, workplace policies, FM, offshoring, capex/opex, balance between home and office-based working).  Accelerated agility would be a good summary.  
  
  
  

Vacancy patterns in the office sector are variable across the region 


Source: CBRE Research 2020.

Research contact: Richard Holberton
Business contact: Guy Holden

• Logistics is seen as one of the best asset classes to weather the current storm, with the importance of fundamentals like e-commerce reinforced, potentially with a lasting effect. Q1 figures did not reflect any impact of COVID-19 and continued with the strong momentum. 
• Nevertheless, the sector does not escape from the general turmoil and occupiers from the manufacturing and traditional retail sectors are facing a challenging recovery. 
• The second quarter has been dominated by short term lease requirements together with online retail and food retailers’ search for space. This combination will further support take-up volumes in countries like the UK. Sale and leaseback operations kept the investment markets alive during the 6 to 8 weeks of drastic slowdown of activities, with a gradual recovery since end of May – starting with core assets. 
• As a general trend across Europe, many tenants are asking for rent deferrals; especially SME occupiers and those in the retail and automotive sectors. Landlords are acting on a case-by-case basis and asking for proof of struggles to avoid opportunism. 
• Most schemes under construction have seen their timings delayed and new speculative developments put on hold as developers adopt a wait-and-see approach. Pipeline for new supply in 2020 will be tightened. 
• Some core portfolio launchings in June are already proving very attractive to investors, anticipating a strong bounce back. 

Take-up, Completions and Vacancy in the logistics property sector in Europe’s Tier-1 Markets 
 

Source: CBRE Research 2020.

Research contact: Tasos Vezyridis
Business contact: Jack Cox

• Retail has now reopened in most European countries, with size, density and opening time restrictions in place and regional variations in for instance Germany and the UK.  
• In general, garden centres, DIY centres and household appliances in countries coming out of lockdown recorded high sales volumes. This was particularly the case in Austria, Germany and the Czech Republic. Sportswear and equipment, leisure goods and footwear are doing well across Europe.  
• Germany registered a record rise in sales in May, up 13.9% from April. The French market demonstrated a similar rebound; however, household spend on goods is still at a lower level than pre-COVID. 
• Footfall is picking up faster in retail parks than high streets and shopping centres. Shopping is more likely to be targeted than window shopping. This means fewer shoppers, but with higher tickets. In the Southern European retail markets that reopened more recently i.e. Italy and Spain (from mid-May onwards), but also Romania that opened its retail mid-June, footfall and sales gained ground more quickly.  
• Although the UK also opened mid-June, it reports a lower level of footfall. This can be explained by a more advanced e-commerce infrastructure and a higher surge of online sales during lockdown in the UK, reaching 32.8% in May. Online sales also explain part of the rise in sales in Germany. In May 2020, it was 28.7% higher than the same month last year. 
• Most European countries have allowed the food and beverage sector to reopen at least in outdoor spaces. F&B turnover will recover slower than other retail categories. 
• Some restaurateurs are still trying to grapple with the impact of a reduced number of covers on their profitability, and will not reopen until social distancing has been eased. 
• Last to open were commonly the entertainment industry; theatres and cinemas. Cinemas were allowed to open by July, at reduced capacity. Operators have chosen to only open a select number of venues where they can, given concerns about profitability and a lack of films until September. 
  

European retail markets gradually opening up

Source: CBRE Research 6 July 2020. 

• The continued disruption caused by the lockdown and prolonged social distancing measures will further accentuate the already existing pressure on brick-and-mortar retail caused by the rapid growth of e-commerce. This will have further consequences for the retail property market. 
• Retail rent collection for the past period, whether quarterly or monthly, was at an all-time low across the globe in Q1, and lower than in other property sectors such as offices or logistics.  
• It is widely expected that this trend will persist in this month’s collection since several retailers that had not yet stopped their autopayments will have done so by now. 
• Landlords are trying to treat retailers fairly, whilst servicing their own obligations for example through sticking to service charge collection.  
• Rent negotiations between landlords and tenants are typically on a case-by-case basis and vary greatly between and within countries and even cities. 
• Long term, it seems likely that turnover rents become the prevailing structure in retail lease agreements, and that pandemic clauses will be inserted. Some retailers will prefer to pay monthly rather than quarterly. 
  

Research contact: Annelore Hofman
Business contact: Chris Gardener

• Leisure travel is expected to account for the bulk of demand in Europe this summer, and occupancies will still be very low compared to pre-recession expectations. 
• For the industry to fully recover, corporate travel, group meetings and conventions, and international travel will need to restart in earnest, which is not expected until there is a vaccine or widely available treatment for COVID-19. 
• Some government schemes have been, or will be, extended; however, it is likely that these measures will come to an end before hotel revenues have suitably recovered – presenting the risk of further financial liquidity challenges.  
• The availability of working capital, or lack of, is likely to be most acute amongst the non-diversified and/or smaller owners and operators, with low cash reserves and/or limited access to credit lines. 
• The cost of reopening, including new measures to ensure the safety of staff and guests, will cause some owners to consider repurposing their asset(s) and we expect a degree of secondary hotel stock to remain permanently closed – which will support wider performance recovery. 
• For prime assets, we are observing keen investor interest, albeit currently at heady discounts and with conditionality. Unsurprisingly owners are reluctant to sell at a significant discount. Forced sales may increase though later in the year. 
• Open hotels run at 13% occupancy (May), this is 5% if accounting for closed hotels too (full supply) (STR). 
• As of 4 July, more than 700 public events (conferences, sporting events, etc.) are cancelled, postponed or modified (STR), something unlikely to change in the short-term. 

• The fundamentals of the multifamily sector remain very supportive as long-term secular trends are still firmly in place. Urbanisation, growing household formation, unaffordability of homeownership for the younger generations and muted supply of new multifamily development in many cities continue to drive demand for the sector.  
• Deal activity has, in general, slowed down in line with the rest of the capital markets as a result of COVID-19 uncertainty and Q2 and Q3 are anticipated to show lower deal volumes, following an exceptionally strong Q1. So far in Q2 multifamily proofs to be the sector attracting most capital in Europe. Interesting is that deal activity is visible across all major markets in Europe driven by both domestic and cross-border investors. 
• Lower competition in the short-term may benefit well capitalised domestic and European investors but global capital is getting ready for a quick response once the impact of the virus fades and travel can resume. 
• Leasing markets have remained relatively stable so far, but some jurisdictions may start seeing some downward pressure on short to medium term rental growth as new leasing activity may level off. 

Investment in multifamily real estate in Europe (rolling 12-month)

Source: CBRE Research 2020

Research contact: Jos Tromp
Business contact: Thomas Westerhof