Growth Momentum
by Xavier Zoutu
The Best in 2019
Barcelona logistics will post the best total return of the region at 10.85% followed by Madrid logistics and Barcelona offices
The strongest capital growth will take place in Barcelona offices at 5.90%
Madrid logistics yields will see compression of 10 bps to 5.20%
Barcelona offices will see growth in rents of 5.90%
Southern Europe is the European region showing genuine 'growth momentum' in performance metrics over the forecast period. Performance expectations are expressed in both occupational and investment transaction volumes which are being sustained close to or in some markets, such as Barcelona offices, above historic highs
Barcelona is one of the most active occupier markets in Europe, so it is no surprise that it leads prime total returns in Southern Europe for 2019 (9.4%); it is also in the top 5 for office returns in Europe as a whole. Average market returns for the city are likely to average 8.1% pa over the 2019-2023 forecast period, driven mainly by income return that will average 6.6% pa.
The weakest prime returns will come from Milan offices at 5.0% pa, a result of it having the lowest income return. Milan though also sets the lowest office yields in the region over the period at 3.30% closely followed by Barcelona. Lisbon is the highest at 4.25%, also forecast to expand the most by 75 bps to 5.00% by 2023.
Vacancy (10.3%) is high in the wider Milan market though low (2-4%) in the central areas where the prime rent is established. The strong prime rental growth of the last two years will reduce. Consequently we anticipate prime rental growth to be subdued (1.7%) in 2019 and 1% over the remaining forecast period.
Rental growth is the most solid in Barcelona offices at close to 6% in 2019, reflective of good take-up, especially in the 22@ submarket.
The strongest total return in Southern Europe in 2019 will be posted by Barcelona Logistics at 10.85%. This will moderate by 2023 to bring the market in line with others in Southern Europe.
The average return will range from 5.7% pa (Lisbon) to 6.2% (Milan). Milan logistics will show positive capital growth of 0.9% pa on average. The average returns over the five-year forecast for logistics, at 9.2% pa, is 300 bps above those for offices.
Yields in the region will float around 5.25% (Lisbon is highest at 6.35%) and are likely to be stable until the end of 2020, with an expansion of around 40 bps expected by 2023.
Milan will exhibit the strongest rental growth of 3.6% in 2019 and 2.1% on average over the forecast period. In contrast, Lisbon will show very little rental growth over almost the whole period averaging out at 0.4% pa, the lowest for Southern Europe.
Milan’s position as a global city for retail is expressed in investment returns, as it sits in the European top 3 with a prime return of 9.6% for 2019. Over the forecast period, capital growth slips back so it will post 3.6% pa on average. It will be overtaken by Rome that while lower in 2019, is stronger at the back end of the forecast and averages 3.9% pa over the forecast.
Milan's status as an international retail destination insulates it somewhat from the negative effects on rents from e-commerce. Rental growth will be strong in Milan in 2019 at 8.3%, but will also fade over the period to 0% in 2023, while Rome’s rental growth will be low but consistent.
Spanish retail rents will be below 1% pa over the forecast period, lower than Italy, reflecting greater penetration by e-commerce in Spain.
Risk to the Forecast
The political situation in Italy represents a persistent risk premium hazard and means bond yields are behaving differently to elsewhere in Europe. This could change the outlook on yields as investors price in greater return.
Another political risk lies in Spain after the election of a new government on 28th April, which will be forced to build a coalition. With this distraction, there is potential for resurgence of the independence movement in Catalonia.