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2017 Mid-Year Europe Real Estate Strategic Outlook

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2017 Mid-Year Europe Real Estate Strategic Outlook

Looking out at the start of this year, the European landscape was beset with hurdles. Elections in the Netherlands and France, concerns over the Italian banking system, and the ongoing spectre of Brexit were all poised to cause the economy to stumble. However, as we sit here half a year later, the outlook is much changed. Confidence is high, growth is accelerating and political risks have reduced.

In this climate it should come as no surprise to see increased tenant demand for real estate space. Office take-up across the major European cities increased in the first half of this year, rising by 6% on the same period in 2016. Although construction activity is showing signs of life, demand is still outstripping supply in most cities, pushing vacancy below historical averages.

We still see the best rental growth prospects in Spain. The recovery in rents may be well into its third year, but with economic growth powering ahead, rents still well below peak and modern stock in short supply, prime rents in Madrid and Barcelona are set for at least another two years of exceptionally strong growth in all three sectors. Other strong performers going forward should include Ireland, Sweden, offices in Portugal and Germany, and logistics in France, the Benelux, and Northern Italy.

Most U.K. markets are set to see rent growth below the European average in the five years to 2021. However, we continue to believe that after a correction, particularly in London, rents should find a floor within the next two years. Depending upon the outcome of the Brexit negotiations, we then see room for a strong rebound. Clearly there is a great deal of uncertainty around this forecast, and the next 12 months of negotiations may be telling for future market performance.

European real estate remains an attractive investment class. Not only is net operating income growth being driven higher by rental growth and falling vacancy, but yields, despite falling to record lows, still offer a considerable spread over other fixed income products. While pricing looks sharp by some measures and may in time lead to a moderation in performance, in the absence of recession or an unexpected tightening of monetary policy, we do not expect any significant adjustment in European real estate pricing.

Source : Deutsche Asset Management

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