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Supply to limit Dublin office rental revival

The recovery in Dublin offices has lagged the broader economic upturn. While demand is expected to improve in 2022, with a full supply pipeline, it is likely that vacancy will stay at relatively high levels over the next two years and rental growth will remain subdued.

4 February 2022

Diagnosing the opportunity in European life sciences

The pandemic-driven boost in scientific research and development will support demand in the European life science sector, at least for the next few years. This bodes well for several markets we forecast, including Warsaw and Copenhagen.

20 December 2021

Omicron poses near-term downside risk to property recovery

The near-term economic outlook has weakened, with the Omicron variant posing further downside risk. Meanwhile, inflation is likely to be higher for longer. However, we expect it to fall back by 2023, allowing interest rates to remain low. This backdrop will support the property upturn, but with the outlook for office and retail still clouded by structural change, it is likely to continue at a slower pace than in 2021. Overall, we think industrial will keep its place at the top of the returns’ rankings in 2022. But, after a period of underperformance, retail is expected to be the winner on average over the 2022-26 period.

9 December 2021
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Rental recovery picks up pace

The recovery in euro-zone commercial property values picked up in Q3, supported by a small fall in yields and an improvement in the pace of rental growth. While retail rents held steady, the quarterly rise in both office and industrial rents was the largest since 2019 Q4. Demand for prime assets and low interest rates will continue to support the property sector. However, with economic activity expected to slow over the next six months or so, and the outlook for the retail and office sectors still clouded by structural change, we think that the property recovery will struggle to maintain its current pace.

Running into troubled waters

Supply chain problems will slow the recovery and keep inflation above target until around the middle of next year. Beyond that, however, the economy should get back on track. After regaining its pre-crisis level later this year, output is likely to converge with its pre-pandemic trend. Meanwhile, we do not expect significant second-round effects from the recent surge in prices and think wage increases will remain quite modest. Headline inflation is likely to drop back below the ECB’s target by the end of next year, as energy inflation turns negative. So while the ECB will end its emergency PEPP purchases next March, it will step up its regular asset purchases and leave the deposit rate at -0.5% until around 2025, which is a lot later than financial markets anticipate.

Why are prime industrial rental values not taking off?

Despite strong demand, we think that high capital values have kept development profitable and have prevented an acceleration in euro-zone prime industrial rental value growth. However, as capital value growth slows there is a risk that some markets will see more upward pressure on rents.

Wider market confirms recovery in prime data

The latest MSCI data show that the wider market has moved roughly in line with our prime data since the onset of the pandemic and provide support to our outlook for property values.

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

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