Europe’s real estate companies are benefiting from strong investor and occupier demand plus rising rents. With cash flow and leverage stable, upbeat business sentiment and wage growth should support the favourable outlook despite the slowing economy.
Scope Ratings says European real estate prices increased in 2019 for the 10th consecutive year. The capital value of the region’s real estate stock has now risen by roughly 11% since 2007. Yields fell again in many segments.
“The property market super-cycle remains intact: conditions are tight in the market for metropolitan residential and office property across Europe and getting tighter for industrial property, particularly sites suited to logistics,” says Philipp Wass, an analyst at Scope.
“The real weak spot will remain the retail sector – outside of Spain and central and eastern Europe – as consumers increasingly turn to shopping online,” Wass says.
Falling unemployment and moderate wage growth should sustain domestic consumption and demand for residential and commercial property despite the outlook for more sluggish economic growth this year in Europe, Wass says.
Among the main trends Scope sees across the European real estate sector in 2020 are the following:
- Rental income will continue to grow steadily, supported by improving occupancy and the imbalance between supply and demand across real estate segments, except for high-street retail, shopping centres and properties in remote locations.
- A lack of capacity in the construction industry is constraining growth in the supply of new office, logistics and residential space.
- Shopping mall operators are reducing their development pipelines to focus on better-performing assets and locations.
- Yields will fall in many sectors, notably logistics and light-industrial property, but also in markets which recovered only slowly after the euro area financial crisis. Demand from yield-hungry investors remains strong – for larger properties in particular – given Europe’s continuing low interest-rate environment. Yields will be more stable in mature markets.
- M&A activity will be driven mostly by institutional investors (insurances, pension funds, private equity) against which real estate corporates, with comparatively less financial firepower, will find it hard to compete at today’s pricey acquisition multiples.
- The scale of fundraising on Europe’s debt-capital markets is likely to steady at elevated levels in 2020, even though the average coupon fell sharply in last year. Plentiful liquidity explains the ease with which real estate corporates have tapped capital markets, raising EUR 82bn in debt and EUR 8bn equity in 2019, taking the total amounts raised to EUR 311bn and EUR 76bn respectively between 2010 and 2019.
“We expect credit quality will remain stable on average in 2020 and beyond for Europe’s real estate corporates,” says Wass.
“While companies’ business-risk profiles are improving at the margin, the sector’s financial risk profiles, especially leverage, will remain little changed.
“With management using any spare financial headroom for investment in pursuit of growth, operating cash flows are not improving as fast as property values and indebtedness are rising, so we expect leverage ratios to worsen as soon as structural (retail), political (residential) and economic (all asset types) risks materialise,” says Wass.
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