Overall sentiment in Europe’s commercial property market was less negative in Q1 as a steadier backdrop appeared to emerge. But this was largely down to improvements in the industrial property sector. That’s according to new data from the Royal Institution of Chartered Surveyors (RICS).
Indeed, RICS’ latest Global Commercial Monitor reports the strongest readings regarding demand for industrial space from tenants and investors in Europe since the survey’s inception in 2008.
Across Europe, a net balance of +37% of survey respondents noted an increase in tenant demand for industrial space. A net balance of +48% of contributors reported a rise in investment enquiries for industrial properties.
In contrast, conditions continue to languish across the European office and retail sectors. Despite the strong performance of industrial property, conditions in the retail and office sectors meant that the overall occupier index remained in negative territory in Q1 at -28 (compared to -40 previously), while the overall investment index was at -9 (up from -17 in Q4).
Looking at individual country data, Bulgaria, Belgium, France, Spain, Italy and Poland all had significantly weaker readings than European averages. At the other end of the spectrum, Sweden and the UK posted amongst the least negative headline readings in Q1, with respondents across both markets noting a more stable trend in occupier demand over the quarter alongside a modest improvement in investment enquiries.
In terms of the outlook, industrial rents and capital values across Europe are expected to further strengthen, with prime industrial units in particular expected to see robust gains in the year to come. Likewise, already positive 12-month expectations for rental and capital value growth were again upgraded during Q1 for data centres, aged care facilities and multifamily residential properties.
With regard to offices, the increased prevalence of working from home is expected to lead to a permanent reassessment of office space requirements from businesses, and a reduction in office footprints is anticipated within the next two years across all European markets included in the survey.
Respondents in France and the UK anticipate office footprints being cut by 14% and 12% respectively, while any such reduction is expected to be smaller in nations such as Cyprus (4%) and Spain (5%). This is likely a factor weighing on office rental growth projections, with rents anticipated to drop by 5% for secondary office space on average across Europe, while respondents envisage a 1% fall in prime office rents.
Meanwhile, projections remain deeply negative regarding retail rental growth prospects. Contributors now foresee secondary retail rents falling by 11% over the next twelve months, with prime retail rents expected to decline by 6% on the same basis.
Tarrant Parsons, Economist at RICS, said: “The latest survey feedback across Europe points to a more stable backdrop emerging in comparison to recent quarters, with this improvement especially evident on the investment side of the market. In truth, this is almost entirely being driven by industrial sector, where key metrics capturing changes in occupier and investment demand are now signalling some of the strongest growth recorded since the European survey was established in 2008. Alongside this, the outlook is also strengthening across several alternative asset classes such as data centres, aged care facilities and multifamily residential. On the flipside of this, ongoing structural changes accelerated by the pandemic continue to negatively affect sentiment within the office and retail sectors, with weak demand and rising vacancies anticipated to feed into further, albeit slightly more modest, rental and capital value declines over the year to come.”