Europe Real Estate
In the second quarter, European countries focused on the progressive and calculated reopening of their economies. During the shutdown phase, most countries used employment schemes that allowed nearly all employee costs to be passed to governments. These programs allowed the unemployment rate to remain stable in the eurozone; however, most of these schemes are expected to expire before the end of 2020. Capital Economics estimates that nearly 30% of the continent’s workforce relies on these programs. The shutdown phase saw a 25% collapse in GDP, and without government support, unemployment would surely be significantly higher. Some recent data suggests a quicker, or V-shaped, recovery from this crisis. For example, construction production in the eurozone grew 28% month-over-month in May, just 12% below its February level. Other data suggests a longer recovery; exports in the region rose by nearly 8% month-over-month in May, 25% below their pre-COVID-19 levels. Government programs have provided short-term relief to employees, so real unemployment levels and their economic severity will not be clear until late 2020.
The UK may see a slower recovery, as its government unemployment support ends in the next few weeks and an undecided UK-EU Brexit deal is creating added uncertainty. The UK must negotiate a detailed economic and political plan with the EU by December. Major topics are still under negotiation, and it appears unlikely that the UK will meet its deadline. Until recently, another area of government standstill was the EU’s €750 billion recovery fund, which was finally approved but only after a protracted debate that highlighted the divergent views of countries that support direct, no-strings-attached stimulus versus those that prefer stimulus loans or grants contingent on economic reforms. It would not be surprising if there are renewed criticisms as the fund is administered, again highlighting the lack of consensus on recovery strategy among EU members.
Amid this slow and uncertain recovery, UK real estate investment activity unsurprisingly fell 10% month-over-month in May to its lowest value since April 2009. However, preliminary data from Colliers suggests that June investment activity has picked up. CBRE reported that Central London office take-up was the lowest on record in May, resulting in a vacancy increase from 4.6% in April to 4.8% in May. Although retail stores could reopen starting on June 15th, Knight Frank reported that less than 50% did so in that first week, indicating increased rent payment delays – or defaults – and possible upcoming vacancies.
Continental Europe’s real estate markets have not been immune to the global crisis either, with public real estate indices declining over 20% year-to-date. Real estate investment reached €43 billion in the second quarter, a 39% year-over-year decline. In this uncertain environment, corporations appear to prefer renewing or extending existing leases instead of searching for new space. Renewals as a share of leasing grew to 51%, up from 29% pre-COVID-19.
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Similar to the U.S., European countries have put forward massive government support to fund the economy.
Sales activity will slow considerably; Q2 data suggests a 39% drop in volume compared to the same period last year.
Office take-up in Central London was its lowest on record in May, pushing vacancy rates higher in the city.
Recovery is likely to be gradual, as both consumers and businesses remain cautious and are limiting spending.