A few thoughts on the European property market in Q1 2021

We believe that an economic recovery finally is in sight. Once restrictions have been eased, experience from the first wave suggests that confidence and consumption will rebound sharply, leading to a consumption-driven recovery of the economy.

The ECB’s monetary policy remains supportive of the real estate market. Monetary conditions are likely to remain loose for an extended period, and we do not expect interest rates to start to rise anytime soon.

Further yield compression is possible, particularly in core logistics markets. Underwritings have to assume rises in real rents to justify target returns. As this cannot be realised in all cases, we do not believe that all deals will deliver.

The grocery retail sector has proven resilient during the crisis (‘essential infrastructure’). In our view, food retail is a resilient investment income stream and a strong buy for core/core+ investors.

We maintain our view that physical offices will remain the hub of company operations, although a fast return to the office seems unlikely in the near term. The office sector is one for 2022 unless you can price in the short-term headwinds.

Due to the predicted ECB interest rate hikes as of 2024 and the expected increase in government bond yields over the next few years, we expect to see a general trend in softening real estate yields in the Eurozone as of 2024.

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