The Referendum outcome leaves Britain unsure of what it has done and the world unsure of the wider implications. The complex task of unwinding and resetting the UK’s relationship with the EU is likely to take many years and dominate UK and, possibly, EU politics for the foreseeable future. There are implications for the whole of the EU not just the UK and these could be both positive and negative.
Since we produced our first report on the EU referendum in February, the bookmakers’ odds against a leave first drifted out from 9/4 (31%) to 9/2 (18.2%) but they have now firmed as the leave campaign has gained momentum and some bookmakers are now quoting 2/1 (33.3%). The opinion polls are still neck and neck and the Stay campaign has serious concerns that the pro-stay majority in the younger age groups are far less likely to vote that the pro-leave older age groups. With only a few exceptions, economic impact studies are continuing to warn of the detrimental impact of a Leave vote. From a property standpoint, the sectors most at risk if there is a Leave vote and if it has a negative economic impact are financial services, legal and accountancy and the tech sector. London is most at risk with Frankfurt and Paris and, to a lesser extent, Amsterdam and Dublin poised to gain from any financial service fall out and Berlin, Paris, Dublin, Amsterdam and Stockholm looking best placed to gain if the UK’s tech-sector takes a hit. Almost as many of our clients expect a lose-lose outcome as do a lose-win scenario. This is because of worries that without the UK, the EU could be subject to further fragmentation, a more anti-competitive policy agenda or even another euro-crisis.
Downward yield movements becoming scarcer With prime yields across Europe having been on a downward trend for nearly four years, further falls are now becoming scarcer. Of 159 location/sector combinations monitored in Q1, only thirty-six saw yields move lower compared with an average of sixty-five each quarter through 2015. Notable market that saw yields fall in more than one sector over the quarter were Brussels, Prague, Amsterdam, Helsinki and Stockholm. Rental increases remain patchy, perhaps affected by heightened economic uncertainty in some markets. Office rents rose in Berlin, Dublin and the City of London, retail rents in Milan, Rome and Budapest, and industrial rents in Dublin, Stockholm and Istanbul.
Our latest annual debt review provides comprehensive analysis of 2015’s trends and considers how and why 2016 may be different. Our key conclusions are: Last year, new lending doubled, rising to €127 billion based on a record €273 billion of CRE investment. Lending margins were generally stable for bilateral lending and LTV levels stayed low, by historic standards. Despite the rise in new debt issuance, the total value of European CRE debt in 2015 was only slightly higher than in the previous year, at €1.1 trillion, because new lending was offset by the retirement of existing debt. NPL activity was robust. Sales were up 23% in 2015 to €85 billion. Dry powder for loans and distressed assets is high and pressure is rising on European banks which have yet to address long-standing, non-core loan books, meaning the pace of deleveraging will continue. Investors have become more cautious. This change in sentiment is a factor in a slowdown in 2016 investment activity and is likely to affect loan pricing.
The recent equity market volatility has focussed many minds on downside risk but there are good reasons to expect that European property will outperform other assets in 2016. Office leasing is still in an early stage of recovery in many European countries/cities, and occupier demand will continue to improve as the economic recovery continues. Office vacancy rates fell at the fastest rate since 2007 in 2015 and are expected to fall further in 2016 helped by a so-far limited development response in most markets. The dichotomy between high performing prime and struggling secondary retail will remain in 2016 but at least rising retail spending on the back of higher real disposable incomes will be of some benefit to all retail. There is increasing emphasis on city logistics property with investors as well as occupiers attracted by the necessity of these properties in e-commerce supply chains.