European commercial property continues to have excellent post-Brexit fundamentals

Despite the recent concerns about the future of a post-Brexit Europe and the inevitable uncertainty this has brought to the property market, the outlook on the whole is resilient and leading indicators suggest that the European economy remains on the path of moderate recovery. Europe continues to support fully functional real estate markets that present opportunities and robust performance.

Based on direct interaction with the market and stakeholders, I find that the appetite for European real estate remains strong and it would seem that Core Europe remains alluring, with Germany a firm favourite for investors, although Benelux and Spain are also firmly in their sights.

In terms of the types of assets investors are looking at industrial & distribution is the preferred sector, reflecting the strength of underlying occupational demand as retailers continue to overhaul their supply chains.

There also seems to be an appetite for specialist asset classes as investors seek out diversification and income security, as well as a means of accessing assets that will benefit from longer term structural shifts in Europe's demography.

For purposes of research, Knight Frank recently polled 150 high net worth real estate players about investor sentiment, and found over half of the respondents agreeing that the UK's exit from the EU will bring an increase in European leasing transactions, while a further third saw no impact on Europe's occupational markets.

We also saw a refreshingly calm tone in the way the respondents are looking to handle their investments going forward. For instance, four in every 10 respondents opined that the decision taken by the UK will fuel increased allocations to European Commercial real estate going forward, while a third suggested that their investment strategy remains unaltered by Brexit.

Several other studies suggest that Europe remains strong in the face of the current economic and political conditions. Occupier market activity has remained strong across a range of European cities this year and aggregate office take-up has risen significantly in the major markets. Rental growth has also continued in core cities fuelled by robust and improving demand and low levels of supply.

Although major German markets, Stockholm and Amsterdam are seeing prime rental levels at a 10-year high, in others, prime rents remain below their 10-year highs suggesting there is significant rental growth potential before we begin to see new benchmarks.

Tier Two cities such as Berlin and Dublin have certainly seen increased demand for office space, particularly from creative and tech industries, while markets such as Warsaw and Prague are benefiting from the demand generated by business restructuring and business process outsourcing.

As we see the full effects of the Brexit vote, business caution may become slightly more disruptive in some cases, but for the time being, occupiers continue to seek space solutions across Europe.
On the investment side, although European commercial property investment volumes have decreased year-on-year, 2016 remains on course to be the second most active year since the global financial crisis.

I see further capital growth across a number of the major European markets. Rising capital values will be increasingly driven by rental growth, particularly in core cities. Investors who are prepared to take vacancy and void risk in established locations will prosper on the back of the improving occupational markets.

There is room for yields to harden in certain markets as part of an ongoing adjustment to the current low interest rate environment, despite the fact that compression is expected to slow. This compression is most likely in markets that have a slight delay in performance such as Amsterdam, Berlin, Dublin, Madrid and Stockholm.

There is a possibility that investment transactions will slow in Germany, France and the Netherlands due to hesitation over elections in 2017; however as we have seen with both the Scottish and EU Referendums, this slowdown in activity levels may only be temporary and markets can certainly recover.

Despite the apparent uncertainty at the moment, it would seem things aren't as bad as we were led to believe. European real estate continues to have excellent fundamentals and there is still an appetite for property across Europe, particularly in the core markets.

Chris Bell has been Managing Director of Knight Frank Europe since June 1999, having previously been the Managing Director of Knight Frank Espana SA between 1991‐1994, and heading the National Offices Development team in London.