The deteriorating sector outlook for EMEA real estate reflects a rising interest rate environment, which is adversely affecting property valuations and debt service costs, Fitch Ratings says in its latest outlook report. Rents’ inflation indexation will be a positive factor, but we are not convinced that landlords across all asset classes will increase rents by the headline CPI in 2023.
 
Retail property is the most vulnerable subsector, with footfall typically still 10%-15% below pre-pandemic levels, tenants’ sales at or above 2019’s equivalent, and like-for-like 2022 rents flat to slightly increasing. Continental European retail assets’ rents and asset values have been less adversely affected than in the UK, where values have reduced by about 60% due to overcapacity, retailer weaknesses, peak-to-trough 30%-35% declines in passing rent, unaffordable rents and high vacancies due to excess space.
 
Logistics rents will continue to increase across continental European markets because land is scarce, supply is disciplined and demand continues despite a post-pandemic slowdown in economic growth expectations.
 
Prime quality offices in central business districts are maintaining their rental values and, where local supply and demand is in balance, new-builds attract tenants despite remote working changes. Secondary offices will be adversely affected. They may not have the fit-out flexibility to adapt to modern workspace needs or inspire workers to return, or meet ESG compliance expectations.
 
We expect the necessity-based demand for residential property and structural undersupply to remain strong. Regulated rents, often containing reversionary terms, will continue to offer downside protection, while rental growth will be constrained by regulatory limits and sometimes by government interventions.