Savills Investment Management (Savills IM), the international real estate investment manager, has said it prefers long-lease income streams instead of value-add and opportunistic strategies that depend on economic and strong employment prospects for 2020, as it sets out some key trends for the coming year.
At the current late stage of the investment cycle, the outlook for pan-European occupier markets is weaker than it has been for some years, according to the investment firm. Various forecasters expect economic growth to remain subdued over the next 12-18 months as global demand loses momentum and several geopolitical risks remain unresolved.
However, Savills IM highlights opportunities in the office, retail and logistics sectors in its Outlook 2020, while warning that investors must be mindful of asset location, structural changes and resilient formats.
Andreas Trumpp, head of research, Europe, at Savills IM, comments: 'At this point in the cycle, we are seeking long income streams. We prefer CBDs, fringe-of-CBDs and central city locations where buildings are located close to good transport infrastructure.
'Markets where modern, efficient office space is in short supply can also provide some interesting opportunities. Multi-let assets with short lease lengths in central locations provide opportunities for rental growth via active management.'
Regarding the UK's unique political situation, the report is largely positive. 'Assuming that either there is a Brexit deal or the UK remains in the EU, London is well-placed to benefit from reduced political and economic uncertainty that would likely support occupier demand,' it notes.
However, the report says that while office take-up remains fairly healthy and demand for industrial is strong, the UK retail sector remains challenged, with one bright spot perhaps found in retail parks.
The scarcity of modern, Grade A space means some rental growth can still be expected in the mid-term, albeit more limited than in previous years. Expectations of lower-for-longer interest rates mean property yields may take longer than expected to bottom out, extending the cycle, according to the report.
Key picks include modern office buildings in well-connected areas of Brussels, Luxembourg, the fringe-of-CBD in the top seven German cities, Paris, Lyon, Milan, Helsinki, Oslo, Stockholm, Lisbon, Madrid, Barcelona, London, Krakow, Wroclaw and TriCity.
Savills IM also flags office core/core-plus opportunities in Copenhagen, Stockholm, Vienna, Germany’s top seven cities (Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich, and Stuttgart) and Warsaw.
Technological developments, demographic shifts and changing consumer behavior are driving huge changes across the European retail sector. Those assets that offer consumers an enhanced shopping experience or convenience are more resilient to the disruption of changing shopping habits, according to Savills IM. Attractive risk-adjusted returns are still available for investors who select assets that can withstand and benefit from structural changes, for which active management is key.
Trumpp adds: 'Retail assets that cater to the shopping experience, such as outlet centres, or convenience shopping formats such as retail parks – which have limited nearby competition and are easily accessible to large population catchments – look attractive, too.
Savills believes in prime retail parks in areas with positive long-term demand prospects in the Netherlands, France, UK, Ireland, Germany, Italy and Sweden, especially if they are food-anchored and include services and experience. Meanwhile, prime high street assets in France, the German top seven, London, large cities in Italy, Copenhagen, Aarhus, Stockholm, Lisbon, Madrid and Barcelona also look interesting.
'Accessibility to main transport networks and labour are crucial ingredients in the logistics recipe,' Trumpp notes. 'As such, we like large modern distribution warehouses that are close to main transport networks as well as smaller urban facilities within, or nearby, large and high-density cities.'
Favoured targets include modern distribution centres along the main transport corridors around Vienna, Paris, Lyon, Marseille, Ireland (M50), Northern Italy, the main German logistics clusters, Sjaelland in Denmark, Helsinki, the Swedish logistics triangle, hubs in Poland (such as Warsaw and Wroclaw), along the main transport corridors and near the main ports in Portugal, Madrid, and Barcelona.
The report also suggests investors should look into urban logistics and smaller-to-medium-sized warehouses in the Netherlands (Bleiswijk), UK, major German conurbations, Copenhagen, Stockholm, Helsinki, Norway and selective opportunities in Austria.