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Real estate: a year in review

February 26, 2019

The start of a new year is always a good time to step back and reflect on the previous year. For the real estate industry, 2018 offered plenty of positives during a time of big uncertainty. In general, we saw many practice caution in 2018 as geopolitical conditions continued to cause ambiguity. The sector did however present many opportunities for those following the right investment strategies.

Rent increases in many CBD office markets

Office rents showed signs of improvement in a number of CBD office markets in 2018. A report issued by M&G Investments in October highlighted rental growth in 13 city markets over the first half of 2018 a similar trend to that reported in the latter part of the year. The annual cumulative growth was highest in Milan with 6.4%, followed by Madrid (5.6%) and Copenhagen (5.3%).

As well as rent increases, CBD markets witnessed a drop in vacancy rates below 3% in many major cities including Stockholm and Berlin. Both positive developments in CBD office rental markets and increasing demand for flexible office spaces have had a role to play.

Strong international capital flows

Appetite for Europe remained strong in 2018 with real estate capital continuing to flow to the continent after record levels of investment were reported in 2017. According to a commentary by Cushman & Wakefield, European transaction growth increased by more than 16% in 2018. Four out of the five spots for international capital were in Europe. London remained the top city for attracting international real estate investment closely followed by Paris and Amsterdam in third and fourth place respectively.

Transaction growth improved in other parts of the world too, with North America being the only exception. The Asia Pacific region in particular witnessed a 32% increase in volumes.

The logistics sector continued to expand

A recent article published by Savills showed a surge in logistic take-up across Europe in 2018 coinciding with falling supply and vacancy rates, which in turn drove rental growth. The highest growth was witnessed in Germany, followed by the Netherlands, Poland, Spain and the UK in stark contrast to retail that faced growing challenges. According to data, the Netherlands saw its three-year average take-up rise by 63% since 2011. Similarly, in Poland, average growth rose by as much as 70% since 2009.

The sector also witnessed lower vacancy rates and, in the UK, a record-breaking amount of speculative developments. In Europe, industrial and logistics space continued to be in high demand.

Investing in alternatives became increasingly mainstream

According to PwC’s latest Emerging Trends in Real Estate report, following a strong investment boom in alternatives last year, 60% of respondents are already investing in hotels, student housing and build-to-rent properties in 2019 and 66% wish to increase their holdings.

These three sectors witnessed good growth across Europe in 2018. In the UK, investment in hotels increased by 28% in the first half of last year compared to 2017. Furthermore, insight from Savills showed the global student housing investment volumes rose by 87% in the last five years. Provisions remain low in many European countries, especially in Italy, where provision is lowest in Rome, (3%).

What to expect in 2019

Growing uncertainty over trade conflicts and geopolitical shifts including Brexit will likely slow transaction activity. For investors, the residential real estate sector will continue to offer a viable and less volatile income stream. Logistics will also remain a popular investment option. Deploying the latest technology will be important in order to adopt the right strategies and stay competitive. Effective decision making across the supply chain will be at the heart of making 2019 a success.

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