Sector, Sector, Sector: A New Mantra for Property Investors
Now that the public commercial real estate market has determined that Covid, for the most part, is over, it is an appropriate time to take stock of where investment capital should be deployed. In Europe, we expect sharp differences in macroeconomic conditions among countries through 2025, forecasting that Spain, for example, will enjoy GDP and employment growth that is more than double Finland’s. One might think those disparities among markets represent a great alpha-seeking starting point.
But Green Street’s analysis shows that the property sector in which one chooses to invest is likely to be far more important that the location of those assets.
Learn more about Green Street’s views on sector allocation: "Heard on the Beach, That's Where the Money Is" 11/2019 in our downloadable report.
We forecast Market-RevPAM (a Green Street proprietary metric representing Market Revenue Per Available Meter; or effective rent + occupancy changes) for the top 25 European markets and four major commercial property sectors. The market that Green Street forecasts will be strongest overall by 2025 vs. 2019 is Stockholm while the weakest is Madrid. Among sectors, industrial looks strongest, with retail the weakest.
“If you look at the disparity between the industrial and retail sectors throughout Europe compared to a baseline of 100 in 2019, there is a 40-point dislocation, or 116 vs. 76. When you compare markets, top to bottom, there’s only an 11-point dislocation between Stockholm and Madrid,” explains Peter Papadakos, Head of European Research. “The point being that dislocation in fundamentals and therefore performance across sectors is much higher than across markets. It means that performance is driven not necessarily by which city you invest in, but in which sectors. And that’s going to be the majority of your alpha-generating capacity.”
Among European property sectors, poor tenant health and a dearth of new tenants continue to weigh on retail. Work from home remains a concern for the office sector, while residential benefits from steady demand and inflation-like growth. Industrial M-RevPAM growth is expected to outpace other major sectors in the coming years as ecommerce tailwinds result in robust tenant demand – especially in locations close to population centers.
Yes, location still matters. Take London industrial for example, for which we forecast a 32% M-RevPAM increase between 2019 and 2025, far and away our most optimistic European sector/market combo.
“The U.K. is the nirvana of ecommerce to a great degree,” said Cedrik Lachance, Director of Global REIT Research. “Ecommerce usage is extremely high in the U.K. compared to anywhere else. I suspect that post-pandemic, we’re going to find out the pace of ecommerce usage has accelerated here more than anywhere else as well. The infrastructure in the U.K. is in place and it’s growing, while the demand for ecommerce also has been pretty fantastic.”
There are other interesting market divergences. Nordic markets are poised to outperform most of their Continental peers across the four major sectors on fundamentals growth. Meanwhile, global gateway markets (i.e., London and Paris) may struggle to return to 2019 levels in the office and retail sectors, though their dense and high-cost nature lends itself to strong industrial growth.
These forecasts and more were discussed at our recent webinar focused on our semi-annual Pan-European Commercial Property Outlook.
Top-of-mind for many participants: fears of rising interest rates and inflation. Listen to Peter Papadakos discuss Green Street’s views on the potential for inflation in Europe:
Compared to six months ago, Green Street concludes that commercial real estate cap rates are lower, unlevered returns are about the same and inflation expectations are slightly higher.
“What has changed is fixed income yields are stable to down. So, the signal from the fixed-income world is pretty positive for real estate,” Papadakos said. “In a real world where you have to allocate capital to fixed income or real estate, we like real estate today more than we did six months ago.”
One of Green Street’s strengths is our ability to detect signals from the public market that are likely to influence private market property performance. The public market is signaling that commercial real estate prices may be too high, while the bond market says the opposite. Given these dueling signals, we believe the overall direction of European prices will rise in the range of 0-5% over the next six to 12 months, with the industrial and residential sectors positioned for the strongest growth.
Compared to this time last year, that should be welcome news, no matter your sector or location.
Green Street continues to enhance its European research, data, analytics, and news businesses. Real Estate Analytics provides actionable commercial property intelligence allowing clients to compare investment prospects across the top 25 European markets in four key sectors: residential, industrial, and office. Our just-launched, customized European REIT Portfolio Search tool provides proprietary market-level data, as well as macroeconomic and demographic metrics standardized across markets and currencies through our Atlas interactive mapping platform. Finally, our recent acquisition of React News gives subscribers access to exclusive European property market news and deals in real time, from the documented leaders in breaking commercial real estate stories.
*React News is a wholly owned subsidiary of Green Street Advisors (UK) Ltd. Green Street Advisors (UK) Ltd., doing business as Green Street, is authorised and regulated by the Financial Conducts Authority (FRN 482269). React News is not part of Green Street's regulated business in the UK or the US and is not a product of the firm's research department. React News operates behind robust Chinese Walls to ensure the independence of React News and the research and advisory services provided by Green Street.
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