According to Savills Research, offices continue to be the biggest sector in terms of turnover, but have lost part of its strength to logistics and housing sectors, which benefit from changes caused or accelerated by the Covid-19 pandemic. Investments in office space are expected to reach c. €60bn in Q1–Q3 202, making up for 32% of transactions, below the long-term average at 35%.
While the share of office investment has declined, core office product pricing remains stable. Prime office capital values continue to rise faster than their respective rental values in most capital cities. On the other hand, investors continue to avoid opting for secondary offices, which need significant refurbishment or repurposing. Despite the drop in office take-up (-24% vs 5ya in H121), we believe that prime CBD (Central Business District) rents in markets with strong demand and supply could experience rental growth again in the medium term.
Retailers and logistics operators have been driving occupier demand for warehouses, and the lack of buildable land has been driving vacancy rates down and rents up. Overall, European logistics vacancy rates have fallen by an average of 80 bps YoY to 4.6% (Q2 2021). As a result, prime rents have risen by an average of 3.2% YoY.
Although retail is the sector that investors are mostly avoiding, due to changing consumer habits and risks around occupier covenant strength, there is a sub-segment that shines: food-anchored assets/supermarkets and strong performing retail parks/warehouses are in high demand. Competition has pushed prices at historic low levels and they are converging with shopping centers, which are experiencing corrections across markets.
One of the key considerations for investor sector and geographical allocations is rental growth and its future outlook. This has become even more important in an environment of rising inflation.
Source: Savills Research