This past week saw a bigger, and arguably better, Munich Expo than any other year. I heard over 80,000 delegates attended the event on the Tuesday, which is quite something.
Commensurate with the big crowd the mood was overwhelmingly positive, with a few common themes cropping up in conversation (including Brexit, but we’ll keep this off the blog-roll this time around).
Alternatives were clearly front of mind, driven by changing urban environments, demographic needs and technological change. Various forms of mixed and single use were being suggested, with the various forms of residential a big theme as traditional sector opportunities continue to dry up. The jury remains out on healthcare and senior living, but urban infill
logistics clearly picking up momentum via land/site acquisitions and I’m intrigued to see what shape these projects take as they come to fruition in 2019.
Several conversations revolved around construction challenges. Not only are we seeing tight labour markets impact occupier expansion, it is now feeding into construction capacity. In some cases, a lack of materials – including bricks – were cited as being part of a broader capacity issue in the industry. Some were having to tender contracts on a pan-European basis just to generate competitive interest. Others were buying land/plots to be built at the will of the contractor.
In the meantime, construction wages/costs are going up which will inevitably be passed onto the occupier. While these over-heating indicators are a bit of a concern, they are typical at this late stage of the cycle. Fortunately, there are some pressure valves in place to let out some of the steam.
are clearly expanding across major European city markets, and as expansion is curtailed by limited availability and declining pipelines, the growth in flexible options provide an alternative to those willing to consider corporate re-structuring.
Broader capacity constraints curtailing economic growth and occupier expansion should see a cooling of demand, so more limited pipelines will maintain relative supply/demand equilibrium. For most markets that means landlord friendly conditions will dominate, supporting income returns via stable and growing rents. That said, a general cooling of demand will see some landlord friendly markets shift to a more neutral, balanced position in 2019.
In terms of investment turnover, less new product via development means reduced ‘market liquidity’. Plenty of big-ticket deals in 2018 involved development projects. If development does dry up, expect to see more money pushing into alternatives, and competitive bidding on projects coming up for sale at punchy yields. Despite the headwind risk of a rise in interest rates, this is expected to remain benign for Europe, with many strategies focused on space efficiency and rental growth to drive longer-term returns coupled with alternative-use options to support exits.
Written by Damian Harrington | EMEA Head of Research