Some uncertainties fade while others appear in Europe

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Richard Malle - BNP Paribas Real Estate

Office take-up in Europe increased in 2016 for the third year in a row, it is the best performance since 2007, writes Richard Malle PhD MRICS, Global Head of Research, BNP Paribas Real Estate:

At global level, GDP growth is expected to improve to 3.3% in 2017 against 3.1% the previous year. This moderate recovery is mainly due to the end of the recession in major countries, like Brazil and Russia, and also a speeding-up of US economic activity. Indeed, the US should record healthy levels of GDP growth, which will probably slow down thereafter. In the UK, economic activity remains healthy at the beginning of 2017, driven by domestic demand as well as exports thanks to the fall of the pound against other major currencies. Nonetheless, a progressive weakening of consumption is expected because of imported inflation. Meanwhile Central Europe remains robust and the Eurozone seems not to be much impacted by recent geopolitical events. The latter should enjoy growth close to 1.6 % in 2017, a slight decline compared to last year (1.7%), mainly due to political uncertainties, such as negotiations around Brexit and national elections like in France and in Germany.

In 2017, there are some key economic drivers to watch out for in real estate markets. First of all, inflation, which owing to an upturn in raw material prices, is set to rise significantly: to well over 2% in the US, over 3% in the UK and circa 1% in the Eurozone. This is good news for rental revenue growth, which will now be upward for years to come. Also, central bank policies will remain crucial. In both the Eurozone and the UK, the situation suggests that rates will change very little, if at all. The US could see an increase in the Fed funds rate during 2017. Lastly, long-term interest rates in the UK and the US could rise markedly. Conversely, the expansive monetary policy of the ECB as well as the more moderate level of economic indicators should limit tension on long-term bond yields in the Eurozone.

In this context, led by the continuous quest for secured assets and the very moderate rise expected in 10-year interest rates, office yields should continue to go down for most cities in 2017, especially in continental Europe. This could be for the last time in the cycle. Consequently, with the relative good health of most occupier markets, total returns are expected to be particularly robust in most European cities for 2017.