Real Estate Convictions Europe : 2020 Outcome

2021 is already shaping up to be a pivotal year during which we expect to gain the upper hand over the pandemic and achieve the hoped-for breakthrough (+5.2% for world GDP). However, there are still many uncertainties we will need to deal with along the way out of the tunnel. A major challenge is emerging for all countries throughout the world: the success of vaccine campaigns, despite the multiplication of variants and the implementation of new lockdowns at the beginning of the year, in order to ensure a revival of confidence and activity from mid-2021.

With the acquisition of a large portfolio of vaccines (2.3 billion doses), based on various technologies already developed or under development, the European Union is aware of the risks of downgrading that could result from failure or too long a delay. After a historic decline of -6.8% in the eurozone in 2020, there is some hope for a resumption of economic growth in the eurozone in 2021 (+4.1%). However, the strength of the recovery will not be uniform across European countries. In Germany, GDP is expected to rise in 2021 (+3.6%) after a contraction in 2020 (-5.3%), a dynamic quite similar to that of the Netherlands (+2.6% in 2021, -3.9% in 2020). In France and Belgium, activity is expected to rebound even more strongly in 2021 (+5.0% and +4.0% respectively) because the decline was stronger in 2020 (-8.3% and -6.2%) compared to the economies of the North. In Italy and Spain, the economic rebound is expected to be 4.5% and 5.8% respectively in 2021 after a decline of 8.8% and 10.9% in 2020.

At its last meeting in January 2021, the ECB reconfirmed the very accommodative stance of its monetary policy to support the eurozone economies. Accordingly, key ECB interest rates will remain at low levels until the inflation outlook of close to 2% is sustainable. In addition, the ECB will continue its work on the Pandemic Emergency Procurement Programme (PEPP), which now totals €1,850bn. One of the effects of this policy has been to enable a reduction in yield spreads between the long-term German interest rate for the largest economy in the eurozone and the other countries.

With €240bn invested in 2020 (-25% year-on-year), including €150bn for the eurozone (-30%), the European commercial real estate market² is declining due to the caution of investors who have largely opted for well-located assets leased to resilient tenants. Investment volumes for Germany (€60bn, -23% year-on-year), France (€30bn, -36%), the Netherlands and Belgium (€16bn, -23%) and Italy €8bn, -34%) remained well above their ten-year average, with the exception of Spain (€9bn, -54%). Overall, prime yields for the best located office, residential and healthcare sectors remained stable or experienced slight year-over-year reductions. On the other hand, the current crisis has had a strong impact on shops and hotels, which saw their yields climb between the end of 2019 and the end of 2020.

¹ Time Magazine cover title for December 2020
² Commercial real estate refers to office, retail, logistics, service and residential real estate for institutional investors.

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Sources for figures: BNP PRE, CBRE, RCA, Oxford Economics.