Catella Market View 2021 – bumpy road ahead

On the one hand, we are now in the midst of a second - now more dramatic - wave of the pandemic, and on the other hand, in the coming weeks we will be able to fully see the effects on the commercial real estate markets from last year in the figures. The entire range of effects will then become visible: in a quarterly comparison, in a year-on-year comparison or even in a 10-year comparison - but: so far, it seems to be a crisis "of the others" - especially in comparison with other sectors of the economy.

This is where the hope of a certain immunity of the real estate markets resonates, at least if one looks ahead. Calculated optimism? Only in part. If you take the capital market perspective, the signs are clearly in favour of real estate. But if we break "the real estate market" down into its sub-segments, a very heterogeneous picture emerges: The status quo analysis plus short-term forecast ranges, in our view, from "still booming", to "quite good", to "sharp drop in investment volume". If we then include the underlying letting and transaction markets in the analysis, the picture becomes rather more diffuse, with a negative balance for 2021. But is this true? We have recorded fewer real estate transactions overall in 2020, furthermore the number of off-market transactions increased significantly (transparency challenge!).

Those who still believe in the immunity of the real estate markets in this pandemic period may like to stick to it. We see things more differentiated. After all, the market phase ahead and its effects are predictable. We know that the negative headlines in spring will increase, as real estate markets traditionally lag behind the economy. The question is: Is this statement still true as a law that can be read in several cycles? More to the point, economic indicators are turning positive again after a disastrous Q2 and Q3 2020. Everything well so far?

To make a long story short: we have an unprecedented range of market reactions:

• Office properties appear more stable than ever as an asset class - at least when looking at 2020 investments - whether this already prices in the efficiency measures "after COVID", we would like to doubt. Remote working will unfold its quantitative effectiveness in the next few years. Rent increases - with the exception of new buildings in premium locations with premium tenants - should rather be seen as a hopeful value. Nevertheless, office investments will remain at the top of investors' wish lists in 2021.
• Logistics properties continue to be in the maelstrom of the ongoing boom. The underlying fundamentals are more than positive, and more than that: cell division within property types has just begun, reinforcing the boom. If the only shortcoming is to accompany the low supply of new construction analytically, it becomes clear: crisis looks different.
• From an investor's perspective, the sun continues to shine on the European residential real estate markets: the "Rise of Resi" will continue, although the available properties are increasingly limited. Provided activities - which they did more than ever in the last 12 months in particular - have a clear focus on conurbations, value adjustments will hardly be necessary. We expect further yield compression and high demand for core assets. However, we also see new players in the market exacerbating demand.
• Retail: The storm is setting in immediately. Here, we expect major market adjustments, both structurally and from the perspective of current valuation levels. While the shopping centre market is one of the "big restructuring items", food retail is proving to be largely resistant to the crisis. We just expect (early) refurbishment activities in the shopping centre segment.

The positioning of other market segments can be found in the document.

In summary: The current and perspective situation should not obscure the fact that there are sufficient opportunities on the European real estate markets to position oneself there. Capital availability is very high, problem solving skills and opportunistic investment behaviour is essential in this mixed situation. This is exactly why we are in a new market phase in 2021.

Download Catella Market View 2021