CB RE RESEARCH EUROPE

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1 CB RE RESEARCH R E A L E S TAT E M A R K E T O U T LO O K EUROPE

2 2017 EXPECTED TRENDS PAGE 06 Economic and Political Outlook 1. Market volatility surrounding key political events but no more major surprises with election results despite the post-uk referendum, post-trump hype 2. The interest rate cycle has finally turned in Europe. They will remain low by historic standards but the trend is now up PAGE 10 Investment Outlook 1. Structural struggle for secondary real estate the continued focus on prime in a risk-averse world 2. US Private equity to start looking for an exit as the US economic outlook improves PAGE 12 Office Outlook 1. The flexibility premium: for a variety of reasons (political, economic, organisational) and with variety of consequences (shorter leases, more breaks, growing focus on shared space, etc) 2. The role of technology: as an occupier in its own right, an enabler of workplace change, driver of building selection, disruptor of CRE processes and accelerator of obsolescence (where lacking) 3. Corporate reconfiguration: acceleration in right shoring, consequences of cost base management (e.g. banks), regulation, labour and skills, core vs satellite locations PAGE 14 Retail Outlook 1. Retail is expected to continue to evolve in 2017; the sharing economy will affect the industry and consumer spending 2. Real incomes to come under pressure from rising commodity prices leading to a slowdown in consumer spending growth in The growing separation in retail rents between prime and secondary locations 2016 CBRE Limited 2

3 2017 EXPECTED TRENDS PAGE 16 Industrial and Logistics Outlook 1. Continued automation of production in response to rising labour costs and the desire to be closer to the market 2. Development is becoming a cheaper alternative to buying or renting 3. Vertical building solutions for lack of space PAGE 18 Residential Outlook 1. Ripple out of growth and activity from inner London to outer London and regions 2. Renewed interest of overseas buyers in London 3. Continued development of the investment grade private rented sector in the UK PAGE 20 Hotels Outlook 1. Due to limited site availability and rising land prices, hotel development will be increasingly concentrated in the outskirts of the city centres. This will also drive conversions from other real estate classes within central locations 2. The development focus is on public spaces rather than guest rooms; public spaces can ultimately lead to greater revenue by attracting in-house and outside guests PAGE 22 Alternative Outlook 1. Growth in private health care initiatives are expected due to retreating government and performance-based reimbursements 2. Renewed Government focus on infrastructure projects will feed investor appetite 3. Millennials focussed concepts will continue to shake up the traditional market; affordable luxury and authenticity is key for new brands (adoption of Airbnb & co) CBRE Limited

4 EXECUTIVE SUMMARY 2016 has been an eventful year with a combination of political surprises, tightening occupier markets and falling yields may bring further political surprises but there will also be a combination of further economic growth, higher inflation and the possibility of the beginning of the normalisation of interest rates. Beyond the economic and political headlines property markets will react in different ways to new challenges. The following sections give our views on what 2017 and beyond has in store for European property markets. Expect a year of political uncertainty and the challenge of rising interest rates in Europe in 2017; despite this, some of the underlying trends look rather more positive for European real estate. December s defeat of the government s proposals in the Italian constitutional referendum added to the results of the UK referendum and the US presidential election to bring 2016 s year of political surprises to an end. Although, all of the talk is now of the growing momentum of populist politics we do not foresee any surprises in the Dutch, French or German General Elections in 2017, although there may well be bouts of political uncertainty and market volatility in the run up to major elections. There will also be ongoing uncertainty in Italy as a result of the fallout from the referendum and the continued frailty of the Italian banking system. Politics aside, however, the gradual tightening of some occupier markets seen in 2016 will continue in 2017, especially for better properties in the better locations. The UK will be an exception. Even though the UK economy will continue to grow at least as fast as other large European economies, Brexit-related uncertainty continues to affect occupier and investor demand. Prospects for retail rental growth will continue to be heavily polarised with prime high streets at one end of the spectrum and secondary centres at the other. Prospects for rental growth in industrial and logistics will also divide; dependent on the ease of increasing supply to meet increasing demand. Despite a gradual turnaround in the long-term interest rate trend, there is still scope for further yield compression in prime assets as rental growth and low interest rates by historical standards continues to make property look attractive or 2019, rather than 2017 are likely to be the years when the yield cycle starts to turn. Beneath the economic and political headlines, real estate is always changing. Figure 1: Predicted rental growth in European markets for % 2.7% 1.9% 2.7% Office High Street Shopping Centres Industrial Top 3 Markets Stockholm (8.3%) Prague (6.5%) Barcelona (6.2%) Dublin (7.9%) London (6.1%) Oslo (5.7%) Stockholm (7.5%) Prague (7.7%) Madrid (4%) Dublin (13.9%) Madrid (7.2%), Budapest (5.9%) Source: 2016 CBRE Limited 4

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6 ECONOMIC AND POLITICAL OUTLOOK WILL EUROPEAN ECONOMIES BRUSH OFF POLITICAL UNCERTAINTY? The global economic background to 2016 was decidedly patchy. Worries about emerging markets and political events bore down on economic growth. As a result we saw the relatively rare phenomena of the Euro Area economy outgrowing that of the US and equally rare phenomena of the UK almost growing as fast as the world economy. All of this looks set to change in was also dominated by political events, particularly the surprise results of the UK referendum and US presidential election but also the no vote in Italy s referendum on constitutional change. Expect more turbulence from political events in OUR KEY EXPECTATIONS FOR 2017 A marginal slowdown in economic growth in Western and Central Europe Central Europe, Ireland and Spain to be the growth leaders Erosion of spare capacity to drive rental growth despite the easing of economic growth Worries over the outcome of the Dutch, French and German elections but no major surprises in 2017 Higher inflation and the expectation that the ECB s QE policy will be scaled back in 2018 and put pressure on long-term interest rates Still scope for further yield compression in 2017 in many markets but the long-term trend for yields is up THE INTERNATIONAL BACKGROUND Emerging market risks were the dominant concern of early They have not gone away altogether but they are much reduced. The focus is now on the US economy but economic sentiment this time is moving in a decidedly upbeat direction. The US economy has already accelerated since mid-year and looks set to continue the pace into 2017, with growth forecast to be 2% compared to 1.5% in After a brief initial adverse reaction, markets now see the Trump presidency as being good for growth and forecasts for US economic growth are being revised up. 1 That said, it is likely that it will be well towards the end of 2017 before any fiscal boost can be enacted but there are downsides if the worst of the anti-trade rhetoric turns into damaging reality. ECONOMIC GROWTH IN EUROPE In contrast to the acceleration expected in the US, growth in the EU, even excluding the UK, is expected to slow from 1.8% in 2016 to 1.6% in 2017 largely a result of rising inflation on real incomes. The recovery economies of Spain, Ireland and the countries of Central Europe may slow from the rapid rates recorded in 2015 and 2016 but they are still expected to continue to be fastest growing parts of Europe. So far, the UK has managed to brush off post-referendum uncertainty, continuing to register positive economic data in the second half of 2016 with retail spending particularly buoyant. This is not expected to last into The impact of higher inflation that will affect all of Europe will be magnified in the by the post-referendum depreciation of sterling leading to a slowdown in growth to 1.5% compared to 2.1% in Another notable change in 2017 will be the emergence of Russia from a recession that was deepened by sanctions but which was primarily due to weak commodity prices. Another notable change in 2017 will be the emergence of Russia from a recession Looking further ahead, Figure 2 shows forecast economic growth rates for the next four years. 1 Global Economic MarketFlash - America Changes Course, Part 1: Donald Trump Wins, November 2016 Global Economic ViewPoint - America Changes Course, Part 2: Implications of President-Elect Donald Trump s Emerging Policy Agenda, December 2016 Global Real Estate Outlook, February 2017 (forthcoming) 2 UK Real Estate Outlook 2017, December CBRE Limited 6

7 ECONOMIC AND POLITICAL OUTLOOK Figure 2: Economic growth in Europe (average annual rate %, ) Central Europe Eurozone Periphery Nordics United Kingdom Other Eurozone France Russia Germany Italy Source: Oxford Economics THE POTENTIAL WINNERS AND LOSERS OF 2017 Central Europe will remain Europe s emerging market with the highest economic growth potential The recovery markets of the Eurozone periphery, dominated by Spain and Ireland, still have scope for further recovery with growth that is considerably above the rest of Western Europe. Ireland, in particular, appears to have achieved escape velocity from the structural problems of the single currency area UK growth will be weaker than in recent years because of the uncertainty associated with the EU referendum outcome The core Eurozone countries of France, Germany and Italy will be the weakest growing of the larger countries. Germany, in particular, will start to be affected by its demographic slowdown while France stands to benefit from some catch-up because of belated structural reforms (assuming that they come in to force) All of these projections relate to national growth rates but the dominant feature of the last 20 years has been the capacity of city economies to out-grow their national equivalents. Over the past decade, for example, the biggest three German cities have seen GDP growth of 1.6% per annum compared to a national average of 1.4%. London s economy has growth at an annual average rate of 2.9% compared to 1.2% for the UK and Milan s growth of +0.8% easily exceeds that of Italy at -0.5%. This trend to greater concentration of economic activity in major cities will continue regardless of the national growth rates CBRE Limited

8 ECONOMIC AND POLITICAL OUTLOOK INTEREST RATES AND INFLATION Inflation is picking up in the US partly because of gently rising commodity prices, base effects 3 and because past growth has gradually eroded spare capacity. For 2017 as a whole, US CPI inflation is forecast to be 2%, up from 1.2% in Economic growth is also starting to push up US wage inflation meaning that real wages will still increase helping to support consumer demand. Euro area growth, by contrast, has been relatively weak and patchy. Inflation is still forecast to accelerate (from 0.3% to 1.5%) but the majority of this change will be imported inflation and core inflation is not expected to move far from its current level of 0.9%. Core inflation is not expected to move far from its current level of 0.9%. This will have implications for interest rates. The Fed funds rate was increased by 25bps at the Fed s December meeting and there are likely to be two, or more, further increases in US long-term treasury yields have already jumped by more than 60bps since the US election (to 2.32% in late November) and a further upwards drift is likely in The situation in Europe is not so clear. Inflation is lower and unemployment remains over 10% in many countries. The ECB s Main refinancing rate will not increase from 0% while QE lasts. At its December meeting, the ECB extended its QE programme 4 to the end of 2017 but reduced monthly asset purchases from 80bn to 60bn. Although this move re-affirmed the ECB s commitment to continued bond market support, it was a taper and a further scaling back is expected in This is likely to mean a gradual upward drift in Euro Area government bond yields in 2017 with acceleration in German 10-year bund yields are expected to be in the % rate at the end of 2017 and are expected to reach 0.9% by the end of These increases will be modest compared to the expected rise in US rates but represent a substantial change from the negative yields recorded as recently as October. In the UK, the Bank of England looks set to maintain its policy rate at 0.25% but long rates will also drift up to around 1.5% at year-end 2017 (up from around 1% in December 2016) to around 1.85% at the end of POLITICS IN EUROPE 2017 also poses a few challenges with General Elections in the Netherlands, France, Germany and continuing political uncertainty in Italy. Right wing populist parties are posed to make a strong challenge in both the Netherlands and in France. Recent hype following the political upsets of 2016 has built up their perceived chance of success in the popular imagination but our view is that they will fail in their attempts to gain high office. That does not mean that the elections themselves will not generate considerable market uncertainty but this will be transitory. In any case, economies and property markets can live with uncertainty witness the performance of Spain without a government for much of 2016 and the UK in the face of post-referendum uncertainty. Italy will continue to be in the spotlight as long as the postreferendum political certainty persists, particularly because of the interconnected uncertainty over the economy, politics and the banks. The most likely outcome for 2017 will be the survival of the new government but we cannot rule out the success of the populist Five Star Movement in the 2018 General Election. Witness the performance of Spain without a government for much of 2016 One aspect of the rise of populist politics in Europe has been their hostility to the EU and the single currency in particular which has driven fears that they will build on the forces unleashed by the UK referendum leading to a more widespread political and economic fragmentation in Europe. In reality, populist politicians have softened their anti-eu stance as their chance of actually being elected has increased. The single currency is another matter but even here policies have become more focussed on reform and flexibility, rather than outright withdrawal from the monetary union. 3 Past falls in commodity prices are dropping out of the inflation calculation. 4 CBRE EMEA MarketFlash: More QE in Europe for now but higher interest rates are on the way, December CBRE Limited 8

9 ECONOMIC AND POLITICAL OUTLOOK PROPERTY IMPLICATIONS More detailed property trends are discussed in the following sections but a number of main themes can be drawn from the economic background to 2017 and beyond: Even though economic growth may be slowing, spare capacity is gradually being eroded particularly in the big cities. This is also partly due to a muted development response so far in this cycle in many cities. This will make 2017 another good year for rental growth particularly for prime properties. The UK, and London in particular, will be an exception. This is partly due to the fallout from the referendum and partly because London, unlike most other big cities, has actually seen a major development response to the post-gfc economic recovery. The potential for higher interest rates will start to pose a challenge to property pricing in many markets despite the anticipated rental growth. Concerning the last bullet point, the impact of higher interest rates, in particular will be a big talking point going into Prime yields have fallen steeply in recent years. Part of this can be put down to the economic recovery and increased confidence in future income growth, but quite a lot of the fall can only be explained by the extraordinary low levels of interest rates in recent years and a search for near-bond like investments for traditional fixed income investors put off by very low bond yields. The logical conclusion is that when interest rates go up, yields will eventually follow. Figure 3 shows our forecast for 10 year government bond yields and for a weighted average of prime office yields in the Eurozone. The key points are: The anticipated increase in long-term interest rates. Property yields lag behind interest rates often by a year or more. Our view is that despite the recent reversal in interest rate trends, we still have more yield compression to come in many markets in London, again, will be an exception. There is not a one for one relationship between interest rates and property yields. In particular property yields have not fallen by anywhere near as much as government bond yields in recent years. This means that the spread of property yields to long-term interest rate has the capacity to narrow in the future. Property yields will still increase, but not by as much as interest rates. Figure 3: Euro Area prime office yields and government bond yields Prime office yields 10 year goverment bond yields 7 6 FORECAST 5 4 (%) Q Source: CBRE Limited

10 INVESTMENT OUTLOOK AN EMERGENCE OF UNCONVENTIONAL STRATEGIES Institutional investors are likely to remain in risk-off mode next year, as they are increasingly willing to accept lower yields rather than climb the risk curve at this point in the cycle. As we advance through the cycle, it is no longer a case of simply deploying capital in order to capture capital value growth will also see different patterns of rental growth in Europe. Whilst rental growth in the UK is likely to be lower than in recent years, rental growth prospects elsewhere particularly in the office market, will provide a positive contribution to value growth. The historically limited development pipeline combined with solid leasing activity has pushed vacancy rates down and rents up. Traditional safe haven assets and locations are becoming less easy to identify and investors will need to adapt their strategies to deploy their capital. It is no longer a case of simply deploying capital in order to capture capital value growth As discussed in our Economic and Political Outlook (pages 6-9), geopolitical challenges will persist in 2017, with upcoming General Elections in a number of countries. Assessing risk across the different sectors and markets is becoming increasingly challenging. Appetite for core property in Europe s most liquid markets will remain strong. The risk-off climate will raise the importance of quality and liquidity for investors and will focus their sights on only the most prime assets which provide what is perceived to be the best security of future income. Supply of desirable core property will remain restricted, particularly in the top German cities and in Stockholm, and further yield compression for the best properties is likely despite the expected rise in long-term interest rates. WHERE WILL NEW PRODUCT COME FROM? 2016 has been characterised by a shortage of stock in the most desirable core markets, particularly the big German cities and Paris. With little on offer in Europe s gateway markets, fresh sources of investible stock may come from private equity parties seeking exits. Opportunistic investors are increasingly taking advantage of the current market liquidity to dispose of assets that have already reached business plan returns. While the benefit from a period of yield compression is evident, many private equity buyers have made substantial quality improvements through intensive capital investments and active asset management. This could provide attractive buying opportunities for investors seeking long-term stability. Aside from dispositions by private equity investors, alternatives could well see an uptick in interest in Alternative sectors, ranging from student housing to healthcare, have already shifted into the mainstream in the UK. These segments may well see further growth in Continental Europe, as they develop into investible asset classes. HIGHER INTEREST RATES As mentioned in the Economic and Political Outlook (pages 6-9), 2017 appears to be the year when the interest rate cycle finally turns. Long-term government bond yields will still be low by historical standards but higher than in recent years and they will be trending up. A large amount of the yield compression seen in recent years has undoubtedly been driven by very low interest rates so increasing rates will be a big talking point. Interest rates, however, are not the only driver of property yields. Expected rental growth, liquidity, investor confidence and expected exchange rate movements and decision lags in investment allocations all come into the equation. We expect prime property yields to see further marginal falls in 2017 followed by stability in 2018 before they begin to trend upwards CBRE Limited 10

11 INVESTMENT OUTLOOK As with many things, the UK will be the exception. There has already been upwards pressure on yields as a result of the leave vote in the referendum and we expect more in Beyond, 2017, however, the UK may buck the European trend with prime yields falling back if some clarity starts to appear regarding the UK s future relationship with the rest of the EU. Fresh sources of investible stock may come from private equity parties seeking exits CBRE Limited

12 OFFICE OUTLOOK A PREMIUM FOR FLEXIBILITY AMONGST UNCERTAINTY We enter 2017 with office leasing markets reflecting: the effects of a relatively weak economic recovery, sharp differences in the timing and strength of market cycles and the risks associated with political developments over the past six months. The effects of these will become clearer as the year unfolds. While these cyclical and political factors are clearly significant, occupiers were already focussed on a range of pre-existing, and sometimes linked, strategic issues. These include talent attraction and retention, workspace management, technology deployment and the enhancement of user experience within the workplace. Expect these factors to become even more prominent on the corporate agenda in LEASING VOLUMES Office leasing volumes across the region have risen by around 4% in 2016 and, in the absence of any major economic stimulus, look set to see a modest increase in 2017 of around 5%. This will keep overall leasing levels at least 20% above those recorded in the post-gfc dip of and, with development still subdued, will induce further downward pressure on vacancy rates. Having been heavily dependent in the early Figure 4: European take-up and vacancy stages of recovery on small numbers of very large transactions, markets will be increasingly supported by a growing prominence of smaller and mid-sized deals. CYCLICAL DIFFERENCES Cyclical differences between markets will be a feature of In particular we will see demand differences between the UK, and especially London - where signs of late-cycle slowdown, exacerbated by Brexit-related uncertainty, are already evident - and some of the major continental European markets. There are two distinct sub-groups in this second category - strong risers in core northern European countries, such as Berlin, Stockholm, Amsterdam, and the cyclical recovery markets of Barcelona and Madrid. Rents in Milan and Frankfurt will also continue to make headway after a promising 2016 and on the back of gradually falling vacancy rates. Prague is also expected to be a strong performer in 2017 although rental growth in Central European markets is generally expected to be lacklustre. Take-up (lhs) Vacancy rate (rhs) Vacancy (%) Take-up sqm (millions) Source: Forecast CBRE Limited 12

13 OFFICE OUTLOOK THE PROMINENCE OF TECHNOLOGY Various issues on the corporate agenda relating to the selection, use and management of office space will come to the fore in In particular, technology s influence on building selection, workplace change and innovation in CRE processes will become increasingly important. The impact of these trends on tenant-appeal, obsolescence profiles and value patterns will become increasingly marked. The prominent role of technology in its own right as a source of leasing demand and urban growth will also continue. Talent attraction and retention, workspace management, technology deployment and the enhancement of user experience within the workplace. TALENT ATTRACTION AND COST: BALANCING THE TWO Alongside this, the twin goals of talent attraction and cost-base management will drive further reshaping of corporate portfolios. In a European context, with unemployment falling and the working age population effectively static, the search for key skills will widen. Expect more focus on redistribution of mid-office functions between core and satellite locations. Finally, with heightened political and regulatory uncertainty affecting sectors of the occupier market, particularly banking and tech, we see a heightened premium for flexibility. This will be reflected in demand for shorter leases, more frequent breaks and a growing focus on shared co-working facilities across more markets and occupier types CBRE Limited

14 RETAIL OUTLOOK MILLENNIALS RESHAPING CONSUMERISM 2017 will see the retail industry continue to grow in spite of the challenges faced. Higher inflation and the squeeze on real income will mean slower, but still positive, retail sales volume growth in 2017 but this will put pressure on rents overall but the key feature will continue to be the gap between prime and secondary rents. THE GAP BETWEEN PRIME AND SECONDARY RENTS Retailers are continuing to see the importance of physical real estate and are benefiting from having key stores in optimum locations. However, the significance of internet retailing to retailers is influencing the disparity of rental growth between the prime and secondary locations. We expect to see a continuation of these rental trends in 2017 and beyond. The well-established centres of retail in Western Europe are likely to see continued strong rental growth, albeit not at the same high levels of Luxury retailers, and retailers looking to make a statement, see these locations as a must have for flagship stores to endorse their brand. The lack of ready new supply in these markets will also create ongoing upward pressure on rents. Higher footfall in these areas provides greater opportunities to leverage bricks and mortar stores in order to drive online sales and provide greater amenities to offer the increasingly essential omni-channel experience to customers. In addition, any appreciation of the US dollar as a result of tighter monetary policy in the US will bring more tourists to Europe which will also benefit the prime locations but with little or no impact on secondary locations. Tourist towns, as well as big cities will also continue to benefit from the growth of tourism spend generally into NEW CHALLENGES Whilst many challenges have been around for a while for example the impact of online and the customer desire for experience new issues are appearing over the horizon. THE SHARING ECONOMY The sharing economy has surfaced as a new issue. This is an economic system in which assets or services are shared or to which access is provided as opposed to being owned outright. The most recognisable examples include Airbnb and Uber. The sharing economy is expected to reach 50% market share in sectors such as holiday accommodation and automobile sharing in the future according to the website GOV.UK. There are no forecasts as yet for the impact it will have on the retail sector but it would be naïve to ignore the phenomenon. As the spending power of millennials and generation z increases retailers will have to be more aware of how ownership habits may change. So what impact will the sharing economy have on retail? There is evidence that millennials are less focussed on ownership and we believe that this trend will continue in The collaborative economy is driven by the young and technology oriented. As the spending power of millennials and generation z increases, retailers will have to be more aware of how ownership habits may change. We have already seen the launch of businesses that allow people to rent or lease products for a specified period. Dixons Carphone provides a lease your computer offer. Consumers pay a monthly fee and receive a new device on a regular basis. Rent the Runway in the fashion sector gives access to high end clothing, again rented for a specified period CBRE Limited 14

15 RETAIL OUTLOOK CBRE Limited

16 INDUSTRIAL AND LOGISTICS OUTLOOK 2016 CBRE Limited 16

17 INDUSTRIAL AND LOGISTICS OUTLOOK A STRUCTURAL SHIFT EXPECTED The industrial and logistics markets in Europe continue to deliver a strong performance, fuelled by a structural need for more efficiency and economies of scale, as well as a steady growth in private consumption. The first effect is characterised by its large e-commerce component, which has led to a need for bigger warehouses in core hubs. As a result, logistics take-up was strong in 2016, although the moving annual total in Europe s key hubs has been gradually dropping from the peak witnessed in 2015 Q3. This is partly due to a shift to more peripheral locations in an answer to lack of space in the core hubs. DEVELOPMENT CYCLES New development has been on the rise throughout 2016 and the share of speculative development has been increasing too. The most competitive development cycle is visible in Poland, where stock has increased annually by more than 10%. Net rents have been eroded in this market which is seeing a substantial speculative pipeline and abundant rent incentives. Other markets with a substantial development pipeline are the Czech Republic, Slovakia, Germany, (south of) the Netherlands and Greater Madrid in Spain. These markets are, however, generally still facing tight market conditions and a strong occupier demand. Logistics is probably the least politically sensitive asset class and has the potential to attract more capital in politically uncertain times. Nonetheless, the prospect for rental growth in these new supply-driven markets is limited, as new projects can be offered at competing, or in some cases even lower rents than existing ERVs, due to a combination of low construction costs and rising capital values. Rents are seeing upticks in more landconstrained markets, but overall rental growth is modest in Europe s logistics sector and yield compression remains the main driver of capital growth. Vacancy in Europe is still low at an average rate of 5.5%, but has been creeping up in some markets, including Poland and the UK. It should be noted that most markets are still undersupplied when it comes to modern warehouse requirements, especially XXL warehouses in core hubs and last mile facilities around the biggest cities. This picture is not expected to change in THE CHANGING FACE OF LOGISTICS Logistics assets will remain an investor s darling in the year to come, supported by the structural shift to bigger, fewer warehouses and city logistics facilities. In addition, logistics is probably the least politically sensitive asset class and has the potential to attract more capital in politically uncertain times. The steady flow of new development will provide the much desired supply for new take-up and investment deals, but is bound to erode market rents in a number of locations, or even cause oversupply at a micro level. City logistics in particular will be next year s key theme and a shift to less conventional real estate solutions can be expected. Facilitated by automated technologies, growth will increasingly be accommodated vertically, with the adding of mezzanine floors, high bays or structural multi-layered warehouses. Inside cities, obsolete warehouse or light industrial property is expected to increasingly adapt to modern logistics needs CBRE Limited

18 RESIDENTIAL OUTLOOK THE DEMAND FOR PRIVATE RENTED SECTOR CONTINUES TO RISE The continued growth in housing demand in big cities is fuelling the growth of the multi-family housing sector in Europe. This, in turn, is helping to satisfy investor demand for stable long-income assets UNITED KINGDOM The private rented sector 5 in the UK has experienced significant growth in recent years, and this is expected to continue, with another two million households forecast to join the sector over the next decade. As a result, the number of multi-family units in the planning pipeline has more than tripled over the last year from 21,630 to 70,500. We estimate there is approximately 50bn earmarked for the UK s multi-family development market from a wide range of institutions. The contribution that the multi-family market can make to the overall delivery of housing is also becoming more widely recognised by the government and will continue to receive a greater level of support. As a result, we expect investment volumes in the sector to increase significantly, as investors continue to be attracted by the demand dynamics, government support and strong total returns offered by the UK residential market. 5 Private rental sector can be defined as multi-family housing 2016 CBRE Limited 18

19 RESIDENTIAL OUTLOOK GERMANY In Germany, the migration into the metropolitan regions, together with low vacancy rates and increasing but insufficient completion rates, means price growth will continue to be robust. We are currently forecasting total rental growth of between 7.2% (Hamburg) and 14.6% (Munich) over the period to The low interest rate environment combined with the flight into tangible assets continues to drive price increases in the condominium market with forecasts between 15.1% (Hamburg) and 27.4% (Munich) to Thanks to the strong economic fundamentals, the future outlook for the German residential investment market remains positive. The high demand for residential real estate portfolios, especially from foreign investors, will remain strong in However, we expect declining investment volumes purely as a result of the lack of suitable product in the market. NETHERLANDS In the Netherlands, investment in the residential market has been at record highs in 2016, and was 32% up in Q3 compared with the same period of Investment now totals 2bn for the year (end November). This unprecedented investment volume has been fuelled by a number of market conditions. Firstly, investors have broadened their search due to a shortage of investment products in Amsterdam, focusing on cities with a favourable economic and demographic outlook. As a result, there has been increasing development activity in cities such as Rotterdam and Utrecht. Secondly, the construction of new stock is not keeping up with investor demand, which is subsequently being pushed into existing stock; investment volume into the existing market is up 24% for the year (to Q3) compared with Overall, we expect this trend to continue going forward as investors move into new areas and diversify across both new and existing stock. IRELAND In Ireland, Dublin registered a strong rental growth of more than 11% year on year (to Q3 2016). Housing delivery has not matched demand for several years, activating demand in the mainstream multi-family market during There has been a severe shortage of residential schemes delivered to the market over the last five years. However, following recent government intervention, a significant amount of new home schemes are now on-site or coming through the planning process and set to be delivered to the market in 2017 / Although development is expected to increase somewhat over the next 12 months we expect to see rental inflation continuing in 2017 and beyond, which will be supportive of activity in the multifamily sector in Dublin. However it is important to be mindful of the potential introduction of rent controls in the near future. We expect forward funding deals to be more prevalent in the market in 2017 and beyond, on the basis that they provide a clear solution to the debt funding gap. Although development is expected to increase somewhat over the next 12 months we expect to see rental inflation continuing in 2017 and beyond, which will be supportive of activity in the multi-family sector in Dublin CBRE Limited

20 HOTELS OUTLOOK ARE PERIPHERY LOCATIONS THE ANSWER? Strong performance growth and economic recovery led to positive outcomes across most markets, particularly in Southern and Eastern Europe. However, the Europe-wide level of investment activity in 2016 declined relative to the previous year. This was the result of a record 2015, in which many large portfolios and single assets transacted. The greatest reduction in deal activity was in the UK and France, where a low supply of investible stock stifled strong investor demand to acquire. Can we expect more activity in the year ahead? HOTEL INVESTMENT North American and Asian buyers are again expected to dominate the market in The relative weakness of the euro and sterling has done no harm to cross-regional interest. Hotels are increasingly recognised as a more mainstream asset class, and more new-entrants are expected to come to the fray in the year ahead. However, a shortage of stock in the highly sought after, globally recognised markets is likely to remain a limiting factor to increasing transaction volumes. A continuation of the flight to fixed-income operating agreements is likely given wider economic and political uncertainties. Events not limited to Britain triggering Article 50, French and German presidential elections, and Donald Trump s inauguration as US President are also likely to cause some investors to defer decisions in HOTEL OPERATING PERFORMANCE From a traveller s viewpoint, political instability and safety concerns will continue to affect their decision-making. Paris, Brussels and Nice all experienced a significant decline in demand for accommodation following respective terror attacks. However, performance in these markets is expected to recover in 2017 as travellers slowly start to regain confidence, notwithstanding any further security breaches. In addition, many European resorts will continue to benefit from the displacement of leisure travellers from North African destinations, as ongoing instability in the wider-region deters the mass-travel market. HOTEL SUPPLY AND DEVELOPMENT Due to limited site availability and rising land prices in many European capital cities, new hotel development is increasingly concentrated in peripheral locations. The Amsterdam municipality, for example, will continue to restrict new development by imposing a moratorium on the city centre; only considering unique hotel concepts for planning consent. Limited site availability is also likely to be a catalyst for property conversion in markets where hotel returns compete with alternative real estate uses. In addition, hotel design will focus on public areas; aiming to enhance revenue generation by attracting residents and non-residents to utilise food, beverage and leisure outlets. The Dutch owner-operator, Citizen M, will continue its European expansion in 2017 and is renowned for augmenting guest living space with vibrant, welcoming public areas. Concepts geared towards millennials will continue to shake up the traditional hotel market as demand for affordable luxury and authenticity grows. In response to this trend, AccorHotels proposed roll out of the new budget brand JOE&JOE is a sure sign of exciting things to come. Following the international hotel company mergers and acquisitions of 2016, we are also likely to see brand consolidation in the coming 12 months CBRE Limited 20

21 HOTELS OUTLOOK Concepts geared towards millennials will continue to shake up the traditional hotel market as demand for affordable luxury and authenticity grows. CLOSING REMARKS Ultimately, we expect the European-wide deal volume to remain flat or marginally increase in Markets including the UK, Spain and Italy are likely to see greater levels of investment activity whilst Germany might struggle to repeat given an exceptionally strong Nonetheless, exciting concept development is anticipated in the operator, occupier space. Brands will battle for market share by rolling out new and trendy brands. This should in turn help to deliver greater owner returns moving forward CBRE Limited

22 ALTERNATIVE OUTLOOK THE SEARCH FOR YIELD AND LONG TERM INCOME Investment in alternative real estate: health care, leisure, infrastructure and other operational assets has grown strongly, mostly fuelled by a search for yield and especially for long-term income. The appetite for operational and long-let assets is expected to strengthen further in the year to come, but political events have caused a heightened awareness for risk that will feed into This means alternative assets need to be either of core quality, or be offered at an attractive price. The financing of alternatives is also a growing market and new alternative debt funds are supplementing the role of the traditional banks. INFRASTRUCTURE The UK, France and Germany are dominating private infrastructure investment in Europe and remain the preferred destinations for most funds because of their stable environment. Infrastructure investment in Southern Europe has collapsed in the financial crisis, but there is renewed interest, building on a price advantage. However, the perceived risk in this region is markedly higher due to the legacy of unfeasible projects done in the past. In CEE, infrastructure remains in general need of updating and expansion, which offers an opportunity. The challenge here is to find the governmental capacity and regulatory environment needed to structure deals. FOOD AND BEVERAGE CONCEPTS The leisure market has been benefiting from economic recovery and growing consumption. Simultaneously, food and beverage has been identified as a successful diversifier of retail and office concepts and is increasingly added to such projects new and existing. This will offer potential opportunities for investors, either as standalone facilities or as part of multi-use projects. A combination of hospitality, entertainment and food is emerging as the ideal mix for attracting customers and this is visible in the rise of market hall concepts and even in a revival of seaside piers most notably in the UK. HEALTHCARE Health care investment has also grown, illustrated by both investment turnover and the growth in health care funds. Next to brick & mortar real estate deals, the purchasing of health care operators or the installation of management contracts a well-known concept in the hotel sector is an emerging trend which aims to tackle the operational difficulties that health care investments bring along. Specialist capacity is needed to manage the assets, which is expected to lead to a growth in specialist funds and private equity involvement in establishing platforms. Still, the majority of health care assets remain residential units or health centres in an office like structure which is the type of property that in terms of layout and location could be used for alternative purposes. The purchasing of health care operators or the installation of management contracts - a well-known concept in the hotel sector is an emerging trend 2016 CBRE Limited 22

23 ALTERNATIVE OUTLOOK Figure 5: Moving annual total index of European property investment (Q = 100) Alternatives All property Index Q1 11 Q2 11 Q Q1 12 Q2 12 Q Q1 13 Q2 13 Q Q1 14 Q2 14 Q Q1 15 Q2 15 Q Q1 16 Q2 16 Q3 Source: CBRE Limited

24 CONTACTS For more information about particular sections of this report or access to our detailed forecasts, please contact: Jos Tromp Jennet Siebrits Joe Stather Richard Holberton Investment Outlook Residential Outlook Hotels Outlook Office Outlook Neil Blake Andrew Phipps Machiel Wolters Ruth Hollies Economic and Political Outlook Retail Outloook I&L and Alternaive Outlook Forecasting For more information regarding global research and activity, please contact: Nick Axford, Ph.D. Global Head of Research Richard Barkham, Ph.D., MRICS Global Chief Economist richard.barkham@cbre.com Spencer Levy Head of Research, Americas spencer.levy@cbre.com Henry Chin, Ph.D. Head of Research, Asia Pacific henry.chin@cbre.com.hk Neil Blake, Ph.D. Global Head of Forecasting neil.blake@cbre.com Jos Tromp Head of EMEA Research and Capital Markets jos.tromp@cbre.com CBRE RESEARCH This report was prepared by CBRE s UK Research Team, which forms part of a network of pre-eminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe. All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. To learn more about, or to access additional research reports, please visit the Global Research Gateway at or our blog at CBRE Limited 24