Market Trends of Europe Commercial Real Estate Industry
The Retail Segment is Experiencing Lucrative Growth
Real wage growth in the United Kingdom and Europe has been negative since late 2021 as high inflation reduced purchasing power. It turned positive at the end of 2023, and it is expected to continue to do so as inflation softens in the second half of this year. This is likely to positively affect retail sales, which have already shown resilience in the face of the recent economic challenges.
While consumer confidence dropped sharply after the start of the Russia-Ukraine War, retail sales in Europe remained stable and, despite a slight decline in 2023, were still above December 2019 levels. In the United Kingdom, retail sales were lower in real terms than at the end of 2019; they were expected to improve in the first half of 2024. As purchasing power increases, retail fundamentals are expected to improve. However, the lagged impact of interest rate hikes is a downside risk.
The pandemic caused a dramatic increase in the proportion of retail sales that took place online compared to in-store sales. However, once physical retail re-opened, e-commerce growth leveled off. The growth rate of e-commerce penetration in key European markets broadly returned to pre-pandemic levels. There was no sustained acceleration of e-commerce growth due to the pandemic. Occupiers will continue to prioritize building an omnichannel customer experience that seamlessly integrates online and offline and enhances customer engagement.
As demand drivers improve in the retail sector, prime rents are projected to record a CAGR of approximately 3% in Europe in 2024, with a return to positive real growth in the second half as inflationary pressures ease. The delineation between prime and secondary assets is set to remain, with the strongest rental growth and the highest occupier demand coming from prime locations well-positioned to serve their catchment and offer the strongest proposition. Retailers will continue to invest in physical stores, with a greater focus on prime locations.
The United Kingdom Holds a Prominent Position in the Market
Interest rate cuts in H2 2024 are expected to bode well for property yields. After peaking in 2024, these yields are expected to stabilize and compress over the following years, signaling a turning point for values across all sectors.
The industrial and retail sectors will benefit from recovering consumer demand as real incomes grow. Prime offices will benefit from a relatively shallow peak in unemployment as job growth continues to grow, particularly in London.
Long rates reached their peak in 2023, but yield compression was expected to continue at least through the middle of 2024, suggesting a bottom for values. However, this would be sector-specific. The combination of high interest rates and declining values rendered debt buyers unviable and created a tight market; this is expected to improve as debt costs decline.
On the other hand, equity buyers are expected to take advantage of discounted values and, according to projections, buy at the lower end of the market price range, making use of positive net present values. As fewer transactions have taken place, it has become more challenging to monitor market pricing. As yields continue to decline, the buyer-seller disconnect will close, resulting in an increase in transaction activity throughout 2024.
