Risk and volatility will dog 2017 but ‘real estate should still have the wind at its back for the best assets and locations’, according to David Hutchings, head of investment strategy in the EMEA Capital Markets group at Cushman & Wakefield in London.
'Across Western Europe, we expect prime yields to fall by 30 to 40 basis points in 2017 and for rents to edge up 2% to 3% across the board,' Hutchings said. 'Investment volumes are set to rise 6% as profit taking frees up opportunities.' C&W forecasts that prime yields in Western Europe will average 4.9% to 5% by the end of 2017.
However, geopolitical uncertainty could put a dampener on the market, Hutchings warned: 'Trump's actual policies rather than rhetoric will be influencing markets on one hand, while financial and banking instability lingers in Europe and could yet emerge in China. At the same time, the French and Germans, amongst others, go to the polls in elections with deep implications for the strength of the EU, the eurozone and more besides.'
On the plus side, there is no shortage of equity and investor demand is expected to be strong next year as bond prices weaken and investors seek out safe but growth orientated opportunities elsewhere.
'The question will be whether there will be supply to meet this demand and what capital will be most aggressive? US demand abroad may ease as interest rates rise but the strong dollar will still encourage some US outflows. More Middle Eastern and Asian investment may also flow towards Europe as investors wait to see what Trump's policies mean to growth and attitudes towards foreign investment,' he said.
Hutchings expects Asia to overtake North America as the chief source of capital flowing into Europe in 2017: 'However, the Europeans themselves will rival this, crossing borders looking for the best mix of growth and stability,' he said.
With growth patterns increasingly differentiated, '2017 will be a year of tiers as some investors, and indeed occupiers, focus on tier 1 gateway cities as others look to tier-2 markets, typically with an aversion to macro risk, making them maintain a focus on the better managed and more stable economies'. The key areas offering well-balanced growth are likely to be Germany, led by Berlin, as well as the Nordics, followed by Spain, notably in Barcelona and Madrid, Hutchings noted.
'Paris will also continue to outperform France as a whole and should be a target for investment, helped by its depth of infrastructure spending. Similarly, London will also remain a magnet for capital despite the Brexit and, selectively, some UK regional cities offer good potential courtesy of their current yield pricing and long-term growth potential. CEE markets will merit more attention for some, offering a yield advantage and catch up growth potential. However, long-term players will be alert to less open and market friendly policies emerging in some areas.'