During the Global Financial Crisis (GFC), the closest comparable situation to the one in which economies currently find themselves as a result of the Covid-19 pandemic, European office investment transaction levels fell 72 per cent from the peak of €140 billion in 2007 to €39 billion in 2009. However, different equity, debt and occupier market fundamentals present the opportunity for a swifter recovery this time around.

Lower forever?

The cost of debt is now significantly lower than in 2008/09 and there is no room for central banks to cut rates further to stimulate demand. Savills research indicates that the yield spread between average European prime offices and 10-year sovereign bonds is currently 72 basis points above the long-term average, which we expect to cushion most price movement.

Pent-up demand

As a result of the above, there’s a higher level of equity waiting to be deployed than during 2008/09 as pension funds still have to meet their liabilities. The problem arises from the inability to physically inspect assets to undergo technical due diligence. To overcome this challenge, some of our teams are successfully offering virtual tours for pan-European landlords and tenants in countries under lockdown. When it becomes possible to view, survey and transact, then the demand for core assets will rise.

Market depth and liquidity

Real estate has become a must-have asset class for many and multi-asset managers have increased their real estate weightings over the last decade. Structural changes in online retail have enabled the industrial and logistics sectors to become more institutional.

Tighter banking regulation

Post GFC banking reforms have resulted in lower levels of borrowing which is likely to prevent any major bank-led or distressed selling.

The bazookas are already out

The five largest global economies have already been more than twice as active in their stimulus packages than during the GFC and governments have announced more fiscal firepower if appropriate in order to maintain demand as they will do 'whatever it takes'. Advanced economies’ national debt levels are subsequently expected to increase by circa 10-15 per cent of GDP in order to prop up the economy until a rebound in consumer demand after the lockdown.

Constrained supply

Speculative office development pipelines are more constrained across Europe, and with Paris CBD and Berlin office vacancy rates well below 2 per cent, the market fundamentals continue to favour landlords. Although covenant strength risks will rise due to weaker economic conditions, we expect prime rents to remain fairly resilient and rental growth prospects to pick up along with the economic recovery. We still anticipate that the rental growth story will continue, but this is more likely to be delivered around 6-12 months later than scheduled.

Early evidence of Q1 2020 investment transaction volumes indicates a resilient start to the year, with some deals being carried over from 2019. Assuming only a spill-over of deals completed in Q2 and that quarantines are lifted by the summer, this would pave the way for a bounce back in transactions to be completed before year-end. We expect the final quarter of 2020 to take a similar shape to that of Q4 2019 and the investment cycle to be prolonged.

Further information

Read more: Savills Covid-19 Resource Hub