European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

ALTERNATIVES

In Europe and indeed much of the globe, the biggest demographic trend is the ageing population. According to the European Commission, the number of people aged 65 years or older in the euro area will increase reaching 129.8 million by 2050. The consistently low birth rates and higher life expectancy are having a significant impact on the population profile across several countries within the euro area. The median age in Germany (46 years) and Italy (46.7 years), for example, is considerably higher than in the rest of Europe. A knock-on effect of this demographic trend is that the working-age population will start shrinking, as a large number retire from the labour force. According to the European Commission, the euro area lost 3.5 million people in the working-age population between 2015 2020, and by 2050, those numbers are expected to further shrink by 35 million. However, this assumes there will not be significant changes in immigration policy and trends. As an asset class, therefore, the later life living sector is an increasingly strategic investment opportunity. The broader multifamily and residential space has also gained more interest among investors in recent years. No longer seen as the niche or alternative sector, this asset type was historically under-represented among CRE investors in Europe. Mortgage rates have been rising sharply across the euro area, pushing up housing costs for homeowners. Furthermore, higher mortgage rates and home price appreciation are eroding affordability and demand. According to Eurostat, 70% of the population in the euro area own their home. This varies drastically by country; home ownership is low in Germany (50%) and even lower in Switzerland (42.4%). Over 80% of the population own homes in Romania, Hungary, Croatia and Poland. As a result, these markets have seen significant house price growth; in third quarter 2022, house prices increased YoY by over 20% in Hungary and Croatia and by 15% in Poland and Romania. The European multifamily and rental housing markets have become increasingly attractive for large investors as they seek safer assets. The low risk-return profile, ability to provide stable income streams and strong capital growth are among the reasons why the sector has outperformed all other real estate sectors. MSCI total returns for residential assets have averaged 8.1% over the past 10 years (2012-2021); in contrast, all property returns have averaged 7.4%. Additionally, with land being scarce—only 2.9% of land in the euro area is used for residential housing—and affordability combined with the increasingly institutionalised nature of the housing markets continuing to be issues, the build to-rent (BTR) sector is emerging and likely in its early days as an asset class.

Another strand of the alternative sector that is on a fast-growth trajectory is life sciences. Ageing populations and the pandemic have spurred an acceleration in public and private investment. As the sector continues to grow, it is beginning to attract more capital. Requirements for advancements in the medical field have evolved, and so too have the requirements for real estate to accommodate those advancements, including lab and manufacturing spaces, as well as office space. Demand will continue to outstrip supply, especially for lab space, pushing up rents and values. A lack of investment options has also driven many investors up the risk curve, seeking value add, development and repurposing stock as the fundamentals for the life sciences occupier markets are expected to remain strong and stable over the long term. The pandemic also became the catalyst for the growth of data centres, as work, play and shopping shifted online. According to Eurostat, the share of households across the euro area with internet access increased to 93% in 2022, up from 72% in 2011. Among the working-age population (aged 16 to 74), 68% ordered or bought goods or services online, an increase from 54% in 2017. Furthermore, 41% of businesses across the euro area were using some form of cloud storage in 2021. The dependency on connectivity, technology and data storage propelled the demand for data centres across Europe. Last year was a year of mixed fortunes for the sector, as a combination of high inflation, rising interest rates and the reduction of the tech sector all had an impact on the operational aspect of data centres. In addition, concerns about power availability for future development threatened to halt new developments. Despite regulatory challenges and an increased focus on sustainability, investment in data centres and infrastructure will remain strong. London and Frankfurt remain the largest data centre markets in Europe. As the need for data centres grows, development is now overflowing into secondary and tertiary markets such as Germany, where projects outside of the prime market of Frankfurt have started in Berlin and Munich. Read more in our latest Data Centre Market report.

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