European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

LOGISTICS

ALTERNATIVES

No Longer Niche The alternative sector, which includes healthcare, life sciences, co-living, later living, hotels, purpose-built student accommodation (PBSA), and built-to-rent (BTR) has fared better than the traditional sectors within real estate. Investor interest in alternatives continues to rise, with the level of investment reaching €58 billion in the last five years.

The strong rental growth momentum witnessed in recent quarters continued in fourth quarter 2022, with prime rents across our European market coverage up 3.7% QoQ and 14.5% YoY. Gains varied widely across the region. The Czech Republic (34%), Poland (28%), the UK (18%), Germany (18%) and France (17%) recorded the largest YoY rental growth. We continue to forecast a deceleration in rental growth in the short term, with a 3.9% and 2.2% rental increase in 2023 and 2024. In the medium term, rent pressure is expected to ease slightly, averaging 1.7% from 2025-2026. It is important to note that, despite a slowdown in annual rent growth, loss to lease adjustments will continue to force occupiers to pencil in substantial rent increases on maturing leases. For investors, this will support a very strong NOI growth outlook. The logistics sector registered the greatest re pricing, with yields moving out by 90 bps on average in the second half of the year alone. This was due to the stretched pricing conditions that led spreads to 10-year government bond yields to compress to just 204 bps at its nadir in second quarter 2022 (versus the 2015-2019 average of 476 bps). We believe that the re-pricing in the sector was front loaded, despite further adjustments still to come in early 2023. In other words, most of the adjustment is in the rearview mirror. Investor interest in the logistics sector is not expected to dissipate, as the sector continues to attract large amounts of capital. Investment toward the sector represented 18% of overall volume in 2020-2022, compared to 11% average over the five years prior to the pandemic.

INVESTMENT BY SECTOR (% SHARE)

Office Retail

Industrial

Other Residential

Alternatives

20% 30% 40% 50% 60% 70% 80% 90% 100%

€3bn

€16bn

0% 10%

2012

2022

Source: MSCI Real Capital Analytics, Cushman & Wakefield Research

The alternatives sector is attractive to investors because it is less correlated with economic growth and therefore offers investors the portfolio diversification they need, particularly during uncertain times. The sector also presents inflation and performance hedging characteristics, which are particularly attractive to investors in the present high-inflation environment. Opportunities within the sector that are linked with underlying structural trends, such as demographics and urbanisation are poised to do particularly well, even during a mild recession.

POPULATION BY AGE GROUP (% SHARE OF POPULATION)

Source: Eurostat, Moody’s Analytics estimated

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