European Outlook 2022

Last updated: May 19th 2022.

Pan-European overview

The economic recovery is set to continue, but risks are skewed to the downside, not only in Europe but globally. In fact, the IMF downgraded its global growth forecasts for 2022 to 3.6%, while it now forecasts Euro area growth of 2.8% in 2022. The indirect effects of the conflict in Ukraine on European property markets through supply constraints, higher commodity prices, higher inflation, and lower economic growth are dominant. The EU’s planned ban on Russian oil imports by the end of the year will likely mainly impact countries that are heavily reliant on Russian oil through higher energy prices. On a more positive note, the Eurozone labour market remains tight. The unemployment rate is at a historically low level, while surveys continue to point to solid employment growth.

As Eurozone inflation reached a record high, the ECB has confirmed to conclude its net asset purchases in Q3 2022. Markets are pricing in the first interest rate hike as early as July. Some national central banks, such as in the Czech Republic and Poland have raised interest rates at a much faster pace. Given high inflationary pressures and ECB rate hikes approaching, government bond yields are set to rise further. While the yield on the German 10-year Bund has eased slightly from the 2015-high of above 1% in early May, Danske Bank raised the 12-month target on the 10-year Bund yield to 1.2%. The EUR swap rate outlook is more moderated. Danske Bank forecasts a five-year EUR swap rate of 1.5% in 2023. While uncertain, the outlook for cost of debt in the Euro area is perhaps not such a seismic shift as in other locations.

While European real estate investment volumes held up well in the first quarter of 2022, there has been a shift in investor sentiment towards certain markets in the CEE region. This divergence could continue as investors turn to locations which are perceived to be safe havens. However, there is a growing risk that headwinds will feed through to investment activity across Europe more broadly. 

The GBP and EUR depreciated against the USD, with the single currency trading at around $1.04 and GBP trading at around $1.22 in mid-May. This provides potential inbound investment opportunities through currency weakening as real estate denominated in the euro and sterling looks relatively cheaper.

With the increased global uncertainty, assets in safe haven locations, with strong ESG credentials will remain attractive to investors, especially those well positioning against inflation. Indeed, real estate, in some circumstances, particularly office and logistics assets in core locations, can act as an inflation hedge. Investors will also need to focus on micro locations and local innovation-driven growth hubs. These innovation-led cities offer the greatest prospect for resilience for commercial real estate investors.

Below, our local experts give their view on European property and capital markets in 2022.

Austria

The Austrian real estate market has generally emerged as a winner from the pandemic, with robust price increases particularly for apartments. Our Active Capital Research finds that the office sector is predicted to attract around one-third of the total cross-border capital coming into Austria in 2022, which will mainly stem from German investors. In the office leasing market, it is still unclear to many companies what long-term impact home working will have on their space requirements. We, however, expect a significant increase in demand for office space by the second quarter of 2022 at the latest once the evaluation of demand has been completed.

Demand pressure for space in the industrial and logistics sector is clearly noticeable. There is currently a shortage of modern or generally available logistics space in the Vienna area. At present, occupiers are having to make do with their existing space or attempt to secure the next possible available space through pre-letting. From 2022 onwards, strong supply of new space will boost letting performance.

In the residential sector, we expect prices to continue to rise in the coming years, albeit at a somewhat slower pace. The primary reason for this is the continued stability of real estate financing. Household debt is still low by European standards and borrowers are mainly crisis-resistant households with above-average and stable incomes. More than 60% of mortgages have a fixed rate of interest which means that they are also well protected against rising interest rates. In addition, social housing, and the regulated rental market in particular play a ‘stabilising’ role, at least for older buildings in Vienna.

Czech Republic 

The conflict in Ukraine has brought a slight shift in investor sentiment towards not only the Czech Republic, but across the CEE region. There will likely be a slight slowdown in investment activity of some international investors for certain assets, but increased activity of local investors which will strengthen their position.

The industrial sector still seems to be in the focus of most investors. A new trend in this field is sale & leaseback. There have already been several transactions of this type in the Czech market. Developers are actively seeking opportunities of owner-occupied properties with some additional development options. At the same time, the market rumour is that despite the very low vacancy rate, developers will limit speculative construction as the building materials prices are rising rapidly. Build-to-suit may thus become the only option for occupiers.

The keyword for the Czech economy is inflation: price growth is happening at a significantly higher pace than the Czech National Bank (CNB) has anticipated. To fight inflation, the CNB increased the base interest rate by 50bps to 5% at its March meeting and by another 75bps to 5.75% in its May meeting.

The increased base rate impacts the interest rate for various types of consumer loans, including mortgages. Mortgage rates have seen a rapid increase over the last few months: by the end of April, they stood at 4.88%, compared to 2.99% at the end of 2021 and 1.98% only one year ago. Combined with the rapid growth of residential property prices, mortgages are slowly becoming inaccessible to the majority of the population. Demand for residential properties to rent saw a massive boost with the inflow of Ukrainian refugees who seek standard accommodation (the current figure is approximately 316,000, which is 3% of the Czech population). New investment funds have emerged, purchasing entire apartment blocks with the intention to lease them upon completion.

The rise in domestic interest rates affects commercial investment for CZK-denominated leases: if the property has CZK-denominated and not EUR-denominated rents, the only available financing is in CZK. At that point, the yield gap between the bank rate and the expected yield on the property closes. Yields will thus either have to continue moving out, investors have to accept lower returns, or some landlords will have to change the rental contracts to EUR which is market standard for most Class A properties. Consequently, the financing can be done in EUR and the current yields are justifiable.

France

Although Emmanuel Macron was re-elected as President of France for another five-year term in April, the legislative elections on June 12th and June 19th did not allow him to gather an absolute parliamentary majority. This could slow reforms the presidential majority hoped to implement. Furthermore, as the elections gave rise to the extreme left and right-wing parties, there are also fears of a deterioration in the social context and greater caution on the part of foreign investors.

Despite the uncertainty due to the Russia-Ukraine conflict, the fundamentals of the French market are solid. First and foremost, and as confirmed by the result of the presidential election, France is a stable country. Moreover, its economy is more resilient than many other European countries thanks to its lower dependence on Russian energy confirming its status as a safe haven location in a particularly troubled geopolitical and financial context. Foreign investors represent nearly half of the volumes invested in the French commercial property market.

Although total investment activity may not be as dynamic as before the pandemic, the number of international investors active in the French market remains stable, while sums invested by domestic players may decrease again after the sharp fall already witnessed in 2021. Therefore, according to our Active Capital research, French offices are expected to be in the global top five for cross-border investment and industrial is forecast to be in the global top 20 for cross-border flows. While our model forecasts a significant increase in cross-border volumes, this is dependent on supply coming to the market which could remain tight.

Limited prime supply, the high cost of land, changing lifestyles and work patterns and the priority of ESG criteria will support the demand for assets that are suitable for change of use or that can be adapted to remain relevant.

Residential assets will also remain among the most sought-after by French and foreign investors, albeit against a backdrop of scarce supply. The success of "traditional" housing will be coupled with a growing interest in senior care and student housing and the development potential of certain concepts that are still relatively new in France (Build To Rent, Co-living). Finally, the renewed interest of investors in retail properties is another encouraging sign, as this asset class was largely undermined in recent years. Demand also remains very strong for logistics, while the rise of the regional cities is confirmed, creating a more balanced French market than before the pandemic.

Germany

At the beginning of the year, the German economy showed clear signs of recovery. While the remainder of the year will still likely see robust growth due to fewer pandemic-related restrictions and case numbers, renewed supply chain bottlenecks will affect the industrial sector and high inflation will put a strain on private consumption. The labour market remains tight with the unemployment rate falling to 5.0% in April 2022.

The German real estate market confirmed its safe haven position as it saw strong investment and solid leasing results in the first quarter. Most of the top seven office leasing markets outperformed last year’s results, with the increase in vacancy slowing down. There is still demand for centrally located high quality space, while rising prime rents remain likely, especially against the background of inflation and building materials shortages. Over the course of the year, leasing activity is expected to prove robust. The performance of the logistics sector also remains stable. Rents are expected to continue to rise while we still see the potential for yield compression.

According to our Active Capital research, German real estate will remain popular in 2022. After the US and the UK, Germany is one of the most targeted destinations worldwide. International demand comes particularly from the US, UK, and the German speaking neighbour countries. As banks are pricing in increased risks, well-funded investors – many of them have a private or institutional background – are in advantage. Nevertheless, the conflict in Ukraine has revealed Germany’s exposure to Russian energy. The so-called “Ampel Coalition” of parties in government faces the challenge to make Germany less dependent on Russian oil and gas. Sustainability and ESG topics are becoming increasingly important for investors.

Ireland

Occupier demand in the Dublin office market rebounded in Q1 2022 (471,000 sq ft). There has been a 47% increase in the amount of space reserved, compared to the end of 2021, which highlights the level of pent-up demand in the market. This is expected to translate into higher levels of take-up in the quarters ahead, with total take-up expected to reach 2 -2.5m sq ft for the year as a whole.

Demand continues to be driven by the technology, media and telecommunications (TMT) sector, which is in expansion mode, with the five largest deals in the TMT sector making up 40% of total Q1 activity. Although the war in Ukraine has created another economic shock, the Irish economy, with its much-discussed unique structure, is as well positioned as possible to weather the challenges immediately presented. Prime rents have increased to €65 psf and are expected to reach €67.50 by the end of 2022. This upward pressure on rents is a result of high levels of demand, combined with a tighter supply pipeline, rapidly rising costs and continued supply chain problems in the construction sector.

Investor demand is expected to remain strong in 2022. It is underpinned by robust job creation in high value adding sectors such as Technology, Professional Services and Finance. The office, residential and logistical sectors are expected to attract the most investor interest. We hold our view that prime office yields will tighten to 3.5% in 2022. Uncertainty regarding the impact of the Ukrainian war and ongoing sanctions will bring some investor caution. However, Dublin remains well positioned to attract its share of the weight of international capital seeking prime assets.

Netherlands

The Dutch economic growth outlook for 2022 has been clouded by the conflict in Ukraine. Oxford Economics revised its GDP forecasts downwards to 3.2% in 2023 from 4.1% previously and 1.6% in 2023. However, the labour market remains very tight, with the unemployment rate falling further to 3.3% in March, while the number of employed people increased. The strong labour market supports demand for office space. Vacancy is low for prime office buildings and some new developments coming to the market should help absorb demand.

As offices are likely to become a space for social interaction and collaboration, more space will be allocated to meeting areas and currently companies are not looking to offload large amounts of office space. Amsterdam prime office rents have remained stable and are still low in an international context which helps attract international businesses in combination with its high-qualified and multi-lingual workforce.

Strong interest from global investors in the Dutch market continues and yields for core office product are at record low levels. Dutch offices are predicted to be in the global top five for cross-border active capital flows in 2022, according to our Active Capital Research. The Dutch industrial sector is also highly sought after by international investors and is predicted to be the fourth most active destination for cross-border capital within EMEA in 2022, according to our Active Capital research.

Poland

While the Polish economy remains relatively resilient, spill-over effects from the conflict in Ukraine on trade and energy amid a planned EU ban on Russian oil imports could dampen short-term growth prospects. The influx of more than 2 million Ukrainian refugees will raise public spending. So far, Oxford Economics has maintained its GDP growth forecasts of 4.2% in 2022 and 3.5% in 2023.

The outlook for the office occupier market in Poland is relatively optimistic. The vaccination program and the slower spread of the virus last summer encouraged many companies to return to their offices. Relocation processes have also been resumed and therefore office take-up in 2022 may be close to levels seen in 2021. Due to limited developer activity new supply in the occupier market in 2022 is expected to reach the lowest level in a decade which may, therefore, lead to a decrease in vacancy.

Polish investment volumes amounted to nearly EUR 1.65bn in Q1 2022, 30% higher than the figures registered in Q1 2021 as there was no impact of the war in Ukraine yet. However, since end-February 2022, many investors who were about to start acquisition processes decided to implement “wait and see” strategies. The impact on the Polish investment market performance is likely to be seen not earlier than in H2 2022. One of investors’ concerns has been the increasing inflation rate and the Monetary Policy Council’s answer to this trend in the form of interest rate hikes since October 2021. The consequences are increasing mortgage costs and decreasing returns on investments. Despite the changing market conditions, prime yields remained at stable levels in all Polish real estate sectors.

Romania

The Romanian office occupier market is in a good position to cope with the ongoing uncertainties. New trends triggered by the pandemic are starting to show, as companies reconsider their workplace strategy and place employee wellbeing and experience at the top of their requirements when searching for new office space. In 2022, we believe hybrid working will continue for most companies.

Multinational companies are expected to enter the market as Romania offers prime office space with green certifications and high-quality technical specifications at a lower cost. The highly qualified workforce, particularly in the IT sector is also expected to be a large draw for multinationals.

Real estate investments in 2022 are expected to be similar to 2021 volumes and will be driven mainly by the logistics and industrial segment, which has proven more resilient to the current uncertain environment.

Likewise, the residential sector will likely account for a bigger share of the overall volume given the increased interest from institutional investors in projects suitable for long-term leasing, coupled to developers generally being more willing to accept lower margins but with a faster exit.

Other segments such as retail and hospitality are expected to report moderate investment volumes. Transactions in these segments will most likely be on a speculative basis and pricing is expected to be adjusted to reflect the additional risks that might further affect the cash flows of these properties.

Spain

The Spanish economy has started to recover from the pandemic, but the outlook is impacted by the conflict in Ukraine. Oxford Economics revised the GDP growth forecast downwards to 4.8% in 2023, from previously 5.1% and 3.9% in 2023, which is still higher than the outlook for other Eurozone countries.

From a real estate perspective, offices have been one of the sectors most affected by the health crisis, but the occupier market is expected to see an increase in demand as workers return to the office. The need for flexibility means occupiers are looking for less desks but more meeting space. Improving occupier demand is also positive news for the investment market and within EMEA, our Active Capital research predicts that Spain is in the top ten for office cross-border capital flows in 2022.

Investor interest in the logistics sector remains strong as Spain is catching up in terms of e-commerce and the demand for last-mile logistics and warehouses continues to increase. Within EMEA, Spain is forecast to be among the top five destinations for industrial cross-border investment in 2022, our Active Capital Research finds. Yields are likely to compress further reaching figures close to 3%.

In terms of retail, supermarkets are the most defensive subsector and attract investor interest as they offer long leases and have performed well throughout the pandemic. Spanish retail cross-border investment will be among the top ten within EMEA in 2022.

Looking at the alternative sectors, 2022 is expected to be a good year for the hotel investment market as the Spanish tourism industry recovers and hotel occupancy levels rise. According to our Active Capital research, within EMEA, Spain will only come second in 2022 for hotel cross-border capital flows, driven by US investors. The Private Rented Sector (PRS) will continue its upward trend in 2022. New PRS developments have more facilities that attract young people who find it is easier to afford rented accommodation.

United Kingdom

As the world deals with higher inflation and geopolitical headwinds, UK commercial real estate has so far weathered the storm.

Commercial real estate markets in the UK have shown momentum in the first three months of the year. Preliminary figures indicate that investment volumes reached £14.3bn in Q1 2022, which was 21% above volumes in the first quarter of both 2021 and 2019. Offices remained the largest contributor to investment in Q1, with 39% of total investment, followed by Specialist sectors with 27% and Industrial 23%.

UK Shopping Centres were also a standout performer. There was £736mn invested in the sector, its strongest first quarter since 2016 and 881% above investment in Q1 2021.

With higher inflation, the global economic outlook downgraded, supply chain pressures and the conflict in Ukraine, there is a high level of global uncertainty, which the UK is not sheltered from.

With this in mind, sterling has depreciated to $1.22, down from $1.37 from the beginning of the year and its lowest level since June 2020. However, with sterling depreciating and hedging benefits on the rise, UK commercial real estate has become notably cheaper, and potentially even more attractive, for some overseas capital.

Indeed, hedging benefits for US dollar denominated investors into the UK are currently at 0.97% on a five-year basis, up from 0.68% last month and 0.31% at the beginning of the year. This is supportive of our Active Capital research, which expects the UK to remain as the second-largest global destination for capital in 2022.

In particular, our forecast expects US private equity companies to be the largest deployer of capital, targeting a wide range of UK sectors.

Subscribe for more

Sign up for regular updates on European markets as well as exclusive market news and opinions, plus the latest financial data, and podcasts.

Subscribe