Just as the COVID-19 pandemic appeared to be behind us, a war has started as Ukraine was invaded by Russia. We are not anticipating significant direct impacts on the European property market outside of CEE. However, the indirect impacts of higher energy costs and weakened business confidence may slow the economic recovery. Historic evidence suggests property pricing usually remains stable during crisis events unless accompanied by a major economic downturn.
Despite the escalation, we expect the direct impacts of the war in Ukraine on commercial real estate to be limited. Investors may show increased hesitancy on Baltic markets and Central and Eastern European markets closer to the Russian sphere as higher risk is priced into valuations. More broadly, there may be some impact at the super-prime end of the residential market in key cities where wealthy Russian individuals have acquired assets which could be frozen, but this is not going to impact the wider residential market.
Occupier markets
We still expect occupiers to take a more active approach to future space requirements in 2022, as new working patterns become more consistent. This will only benefit the buildings in the market which are compatible for post-COVID-19 occupation. For example, in Central London 90% of take-up in 2021 was for Grade A space. The remaining part of the market will need to see significant capex, and for assets in weak locations obsolescence rates are set to accelerate.
Logistics markets are more buoyant with a handful of markets recording prime rental growth in 4Q21. Though, it is questionable whether the rental growth levels will justify the ultra-low entry yields. With inflationary cost pressures coming from all angles, the willingness or ability of logistics operators to pay ever high rents will be tested in the coming quarters.
Capital markets
A significant amount of capital has already been earmarked for deployment into European real estate this year and we think the majority of that capital will still be deployed, a lth ough there may be some more caution in the coming months and deals could take longer to complete. At this stage, we would not anticipate significant movements on the pricing side. Looking at historic crisis events, there is very little evidence to suggest there is a direct impact on property yields where the event has not been accompanied by major economic challenges. There is, in fact, some evidence that core property is seen as a safe haven asset during times of crisis and yields have moved in. Whilst pricing may prove to be resilient, lenders are likely to require higher spreads to reflect the heightened risk premia and general negative sentiment in financial markets.
European life sciences: Fad or long-term growth opportunity?
It is no coincidence that the surge in interest in life sciences real estate in Europe emerged during the first major global pandemic in over a century. But as the pandemic (hopefully) fades away, will this emerging sector also run out of steam?
Europe is still a very different market to the US. Even with an increase in interest, the VC capital going into European companies in 1Q-3Q21 was just 22% of the US total (see Figure 3). But there is a clear trajectory of more funding targeting companies based around the top R&D universities in Europe. Whilst the sector is high on everyone’s agenda, there are few specialist players with the track-record to deliver the right space for occupiers under a strict timeline. This creates a window of opportunity to pre-emptively follow the funding capital, and target markets in Europe where there is a particular hub of excellence in one area of bioscience research. These are not necessarily in the largest traditional office markets, and we foresee better opportunities emerging outside of the crowded core markets where even traditional office yields are at record low levels.
Here you'll find the complete outlook 'Real Estate Outlook – Edition 1, 2022 - Challenging times' from UBS Asset Management.