EMEA Sector Outlook
European GDP Forecasts
Source: CBRE House-View, CBRE Research, 13 May 2020
Research contact: Aaron Hussein
Source: CBRE House-View, CBRE Research, 13 May 2020
- European economies have contracted sharply so far 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 are now at a 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. The exceptions are travel and leisure restrictions which will likely be in place to Q4 2020.
- 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.
- Policy interventions by the ECB have prevented a major widening of spreads in government bond yields so far. The extent of current bond yields 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 deficits which is fermenting divisions between euro area countries. Some countries would like to see Eurobond issues, but this is being fiercely resisted by others. This is likely to be a policy debate for some time.
- 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.
Research contact: Aaron Hussein
- Despite best Q1 on record in Europe, market sentiment has deteriorated sharply since the end of March with an increasing amount of deals affected.
- Low investment volumes expected in Q2 and even Q3 given current wait-and-see position of market participants.
- As we emerge from the COVID-19 crisis, Logistics and Residential sectors considered to be the most resilient. Hotel and Retail sectors expected to have a longer-term recovery shape.
- Core markets still active, while Value-Add investors waiting for repricing and / or better access to debt.
- Amidst lenders’ public statements of being open for business, the reality is that the debt markets are almost on pause for now, with very little capacity for new business. All-equity buyers likely to be winners in this environment.
- Underwriting conditions altered for lenders as syndication and securitization are challenging in the current market.
- Cost of borrowing has increased slightly, with the majority of those surveyed internally observing a 0-50 BPS increase and a third an increase above 50 BPS.
- Limited movement in Q1 yields visible, except for Retail and Hotel sectors.
- While cap rates have been expected to expand, notably for Retail and Hotel, there has been limited market evidence to date.
- Bid-offer spreads have emerged in several sectors and countries, with potential discounts of 5-10%. No signs of distress selling yet.
- New occupier requirements and searches much weaker, especially for small units. This will put downward pressure on leasing activity during Q2 and Q3.
- For the major European markets combined, Q1 take-up is around 23% lower than Q1 2019; and 5.5% lower in year-on-year terms.
- Vacancy now stable in overall terms having been on a downward trend for several years. Vacant space already rising in some markets (Paris, London, Berlin) but still falling in others (Amsterdam, Warsaw, Milan). We expect more general rises in vacancy as demand weakens further in Q2.
- Further out, supply side activity is likely to be adjusted downwards due (a) to developers holding back on new schemes and (b) existing ones impaired by disrupted supply chains in construction materials.
- Requests for rent abatement or relief becoming more widespread, but landlords showing some resistance.
- Headline rents effectively flat in the short term, but still up 1.5% year-on-year, with expansion visible in incentive packages.
- Occupiers expected to undertake comprehensive assessment of their real estate portfolio over time.
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.
Nevertheless, the sector doesn’t escape from the general turmoil and the strong Q1 performance is not reflecting the slowdown in activity since end of March. A challenging Q2 is expected.
The second quarter has been dominated so far by short term lease requirements and sale and leaseback operations lead the leasing and investment markets.
General trend across Europe is that many tenants are asking for rent deferrals especially in retail and automotive sectors, but also 3PLs serving retailers.
Most schemes under constructions see their timings delayed and new speculative developments put on hold as developers adopt a wait-and-see approach.
A strong bounce back is expected at the end of the year.
- In most European countries from mid-March to mid-April, the only retailers allowed to open were supermarkets, pharmacies, tobacco shops, and pet stores.
- Retail in Europe has started reopening gradually since mid-April. Governments follow a staggered approach, with some retail categories and unit sizes allowed to open sooner than others.
- Retail has now reopened in Austria, Germany, Poland, the Czech Republic, Greece, France, Belgium and Italy, with size, density and opening time restrictions in place and regional variations in for instance Germany and Italy.
- In general, garden centres, DIY centres, hobby shops and furniture shops in countries coming out of lockdown recorded high sales volumes. This was particularly the case in Austria, Germany and the Czech Republic. Apparel will take the longest to recover.
- 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.
- Whilst restaurants in some European countries were allowed to open for take away and delivery only throughout lockdown, from Mid-May onwards food and beverage has opened up in some European countries for regular service now.
- In the Czech Republic, Poland and the least affected areas in Spain 30% of outdoor seating is now open.
- In Austria and Italy, F&B has opened for table service mid-May.
- 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 is commonly the entertainment industry; theatres and cinemas.
European retail markets gradually opening up
Source: CBRE Research 2020. 21 May 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, and lower than in other property sectors such as offices or logistics.
- It is widely expected that this trend will persist in the next round of collection since several retailers that had not yet stopped their autopayments will have done so by then.
- Landlords are trying to treat retailers fairly, whilst servicing their own obligations for example through sticking to service charge collection.
- Long term, it seems likely that turnover rents become the prevailing structure in retail lease agreements. Some retailers will prefer to pay monthly rather than quarterly.
- March hotel performance, based on HotStats data, shows a significant decline in total hotel revenues, averaging -71% y/y across Europe’s key cities (based on properties which remained open for part of or all the month);
- It is expected that April data, once released, will reveal even larger declines in revenues as more hotel markets were affected by restrictions on movement and/or forced business closures. Data from STR showed that 76% of hotels across Europe were closed as of 30th April;
- CBRE Analysis shows that a y/y decline of 70% in total revenue yields an average decline of 137% in gross operating profit for key European cities;
- Hoteliers were able to reduce operational costs in March. Total costs were down 43% y/y, according to HotStats, largely resulting from a 35% reduction in payroll costs. However, fixed costs continued to drag on profitability;
- Data from STR shows that occupancy levels across Europe for the month of April averaged 11% (based on open hotels). Analysis by HotStats found that the occupancy level required for hotels to break-even at gross operating profit is circa 35% but varies based on the positioning the hotel.
- We note that the working capital burn rate for a closed hotel is almost always greater than for an open hotel.
- Looking forward, we think about future demand across the key major travel segments:
- Domestic travel will be the first to see a return of activity. This will be predominantly supported by the gradual reopening of economies alongside the lifting of some travel restrictions.
- International travel demand will take longer to return, with short-haul recovering before long-haul.
- Tourism Economics, as per their April 2020 forecast, expect most key European cities to see a recovery in the volume of international nights in paid accommodation to 2019 levels by 2023/2024.
- Markets expected to see a relatively rapid recovery in international demand have, to date, experienced comparatively low infection rates, have historically relied more on short-haul inbound travel demand, and typically appeal to source markets which are well positioned to experience a strong economic bounce back.
- As a result, markets predicted to see a relatively fast recovery in international accommodation demand levels include Athens, Budapest, Oslo, Warsaw, Prague and Berlin.
- Leisure travel is likely to see an immediate surge in demand, particularly staycations. Countryside and rural hotels across Europe are expected to benefit from this trend first.
- Generally, the growth rate of corporate demand has been lower than the growth rate of leisure demand over the last decade, and whilst corporate travel will return as economic activity resumes, we expect this to be limited and remain below ‘normal’ levels for the short-to-medium term.
- International meetings, incentives, conference and events (“MICE”) is likely to be the most impacted travel segment and will take the longest to recover within the hospitality sector.
International Nights in Paid Accommodation Recovery Index
Source: Tourism Economics (April 2020), CBRE Analysis
Contact: Joe Stather
- 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.
- 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)