Europe Real Estate
The third quarter has started with much of Europe returning to normal as vaccine rollouts progress at a steady pace. Restaurant reservations are higher than pre-pandemic levels, and the number of flights across the continent continues to rise. Overall mobility in the four major eurozone countries has reached between 5% and 15% below early 2020 levels. More employees are returning to the workplace, with visits to places of work now only 10% to 15% lower than pre-pandemic levels, according to Capital Economics. Eurozone unemployment dropped in May to 7.8%, fueled by strong economic recovery and some continued government support. Unlike the U.S., Europe is not facing a major labor shortage, and the region has not seen the same wage pressure. We expect to see a divergence in the next year as the U.S. and Europe move through recovery after implementing different unemployment support policies during the pandemic. Despite these promising signs, there will likely be some distress following the economic stagnation of 2020. European non-performing loan (NPL) sales grew in the second quarter, totaling €53.7 billion for the first half of the year after NPL activity had consistently declined from peak levels in 2014.
Real estate markets have not yet caught up with the economic recovery, but initial signs of activity are strong. In the first half of the year, investment volumes likely saw their lowest levels since 2020. However, brokers note an increase in property tours and strong investor appetite for prime assets. Office take-up was down 15% year-over-year in the first quarter, but with employees returning to the office and economies reopening, occupier demand will likely rebound in the coming months. Retail properties continue to face headwinds despite economic improvements, and industrial markets remain the most resilient.
In the UK, major government furlough programs will end in September, and early employment figures are promising. In May, 2.4 million workers relied on the programs, compared to 3.4 million in April and a peak of nearly 9 million in May 2020. While there still may be a spike in unemployment once the support wanes, it will likely be offset by new jobs from the boost in economic activity. GDP estimates suggest 2% growth in May, pushing GDP to only 1.8% below pre-pandemic levels.
Unsurprisingly, investment activity was weak early in the year, totaling only £11 billion; however, that is not much lower than historical first quarter averages. Like the continent, there continues to be strong investor appetite for industrial properties. Investor interest in the office and retail sectors remains low but has improved notably since last year. Central London saw the lowest quarter on record for office take-up in the first quarter, and vacancy rates rose to 8.9%.
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Overall eurozone real estate investment activity remains weak in 2021, but levels vary depending on property type.
Eurozone office take-up will likely increase later in the year as economies reopen and workers return to workplaces.
The number of furloughed workers in the UK continues to drop with government support scheduled to end in September.
Central London office rents continue to drop as vacancy rates increase.
Unemployment rates in the UK and eurozone remain relatively stable compared to the U.S. due to differences in government support programs.