Five key factors that moved the real estate market in 2019

Against a tumultuous global backdrop in 2019 - including Brexit uncertainties, economic slowdown in Europe, geopolitical tensions accompanied by higher import tariffs, and a slowdown in investment and foreign capital - the real estate market, which is closely bound to economic fluctuations, changes in financial structures and investor profiles, is at a crossroads. Are we on the cusp of a new cycle? We look back at the factors that affected the market this year.

Slowdown in the European economy 

In 2019, European economic growth slowed by more than expected. In particular, it has been weakened by the escalation in the trade war between the United States and its main partners such as Europe and China, the uncertainties linked to Brexit, as well as geopolitical tensions in many countries such as Iran, Turkey, Syria, North Korea and Hong Kong. Over 2019, growth in the region is expected to reach 1.1%, compared to 1.9% in 2018.

Germany, which has distinguished itself economically in recent years, is seeing a sharp slowdown in GDP growth, expected at 0.4% in 2019 compared to 1.4% a year earlier. One of the main reasons is the fall in exports, which accounts for almost half of the country’s GDP. For example, US plans to tax the automotive sector, a lynchpin of Germany’s economy, have cast a long shadow of doubt over the market trend.

After having performed decently since 2016, the United Kingdom is showing signs of weakness and suffering from the overdue resolution of its relationship with the European Union, whatever shape it may take. Sterling’s fall of some 20% since the referendum three years ago and the slide in corporate investment caused by this mire of uncertainty are weighing on the British economy. As such, even though unemployment is still low at 3.8% with 32.8 million people employed, around 58,000 jobs were lost in the UK in Q3 2019. Yet some countries are thriving.

One of them is France, where economic indicators are more encouraging, pointing to GDP growth of about 1.2% this year. Among the favourable signs, the contribution of domestic demand to added value is still positive (1.5 points), driven by the expected creation of around 250,000 jobs over the year, while investment growth is still at a healthy 2.8%, as it was in 2018.

Meanwhile, Poland and Hungary have the second highest growth in the European Union this year after Malta, with GDP up by more than 4%.

Even though we are seeing an increasingly marked slowdown in the European economic area, it is too early to start talking about a recession as there are many fundamentals underpinning activity: a robust job market, rising household income, a healthy trend for corporate results and interest rates that are as low as ever. Furthermore, most of the bad news appears to be priced in and news could be good (or not as bad as expected) over the coming quarters, which may restore the confidence of market participants and help growth to stabilise or even grow slightly in 2020.

The impact of Brexit on European real estate

In 2019, investment in commercial real estate in the United Kingdom is expected to fall to nearly € 50bn, a 28% drop in one year, making Germany the leading investment market this year at nearly € 60bn. This shows that the many delays to Brexit are holding back commercial real estate in the UK, after respectable market performances in 2017 and 2018.

But are European capitals benefiting from British woes? About 250 financial institutions have opened new headquarters in the EU to cushion the Brexit impact, according to the thinktank New Financial. In Paris, Brexit has already led to the relocation of 1,500 jobs in the finance sector, according to Paris Europlace. Dublin has attracted many jeopardised asset managers and investors while Frankfurt has kindled the interest of banks and investment banks. Brussels has also played its part by attracting several institutions such as Lloyd's, QBE, MS Amlin, Moneygram or Transferwise. But the postponement of Brexit has prompted a lot of big groups to delay relocation. Most have opted to open offices or local branches to keep their European passport, thereby enabling them to sell financial products in the Eurozone.

Low interest rates: friend or foe?

Historically, low interest rate policies have gone hand in hand with economic weakness and low inflation. Over summer 2019, yields fell to record lows, reaching new floor levels, including a German bond yield that plummeted to -0.7% for a 10-year maturity. However, the economic community is questioning the positive aspect of this situation while the European Central Bank (ECB) has exacerbated it by lowering the cost of borrowing and buying more bonds. These low interest rates are disrupting the financial model with banks now being charged -0.5% for depositing their liquid assets with the ECB. Life insurers’ solvency ratios are also deteriorating. Meanwhile, the ECB’s latest decisions have prompted harsh criticism from within the ranks of its own Governing Council.

Despite these warning signs, the fundamentals would appear to argue for a lasting period of low interest rates, which in the medium term should be held down by the expansive policies of central banks, very moderate economic growth, low inflation, ongoing risk aversion and the continued abundance of global liquidity, which will naturally gravitate towards fixed-income products. This is why, for the first time since 2016, the consensus among economists is for long-term interest rates to stabilise in 2020, in the absence of an expected increase.  

Real estate investors seeking to diversify

In the quest for ever-higher yields and revenues, real estate investors are venturing out of their comfort zones and opting for alternative investments or for niches that are in their infancy or hitherto very little explored. Residential real estate and alternative housing such as student accommodation are among the sectors that have flourished this year. Whereas in the 2000s, institutional investors gradually relinquished residential property to focus on the more profitable returns offered by offices, retail or logistics, we are now seeing renewed interest in this asset segment, thanks to the solid growth and sustainability of its prices, as well as yields that are admittedly narrow but not as low as they were before the general fall in yields.

Meanwhile, outdoor tourism is in full swing and is another example that has secured success with real estate investors. With a move upmarket to meet the new aspirations of holidaymakers seeking greater comfort and a wide range of equipment and activities, its performance indicators are on the rise (+15% footfall since 2010). According to Eurostat, Europe has nearly 28,500 campsites, 70% of which are concentrated in 5 countries: France (27%), the United Kingdom (16%), Germany (10%), the Netherlands (9%) and Italy (8%). As such, the outdoor hotel sector is an asset class that has not yet been explored but is particularly interesting for investors. Attractive yields and cash flows secured by long-term leases are advantages in a portfolio diversification strategy. And with the number of campsites in operation tripling since 2015, the enthusiasm for "outdoor hosts", as they are now called, shows no sign of abating.

Midway between accommodation and hospitality, the co-living market also has high potential in terms of investment. With the increasing difficulty of finding housing in areas of high market tension, this hybrid model, which offers value-added services, is increasingly popular with students, young workers and people experiencing transition in their lives, and it could follow the same path as its office counterpart, coworking. As a pioneer in this high-potential market, BNP Paribas Real Estate has just launched ColivMe, the first co-living marketplace in Europe, which aims to become the benchmark for co-living professionals and users.

Coworking: a sustainable model?

What with Co-living, Coworking, etc., real estate too has been caught up in the sweep of the “Co economy”. As new ways of working proliferate amid new societal aspirations, the coworking trend in commercial real estate has taken hold in recent years and represents an appealing market for investors. Substantial doubts have been cast over the coworking business model in 2019. Yet this scepticism has not hampered the buoyant market trend and this new way of working looks set to last. As such, coworking spaces are multiplying in Europe and have greatly contributed to the healthy rental trend, accounting for a double-digit share of the take-up in cities such as Amsterdam (21%), Barcelona (20%), London (17%), Milan (12%) and Brussels (11%).

Despite a weaker economy than in 2018, the European real estate market proved itself to be resilient in 2019. The economy looks set to consolidate in 2020 at a level similar to, or slightly above that of this year. Enough growth is therefore expected to enable a positive trend for letting markets, notably in terms of the level of supply and rents. Added to this is the financial backdrop of low interest rates, which should once again squeeze yields in most real estate asset segments. In this context, the upward cycle for real estate asset values should continue in 2020.

Caroline Caouren & Richard Malle