The macro fundamentals for investing in real estate remains positive. While German 10-year sovereign bond yield -0.6% pa, Berlin prime offices yield 2.7%, with the current yield spread 30 bps above the long-term average of 300 bps. With the European Central Bank adopting a dovish policy to stimulate demand and avoid deflation, we anticipate the yield spread to remain attractive across Europe’s core office markets.

In many respects, the supply/demand dynamic appears similar to 2019 with rising equity commitments to European real estate, although we are observing a shift back to core strategies. As we move into 2021, we expect to see more price-point clarity emerging for core-plus, given the shortage of vendors for ultra-core/core stock.

Savills latest European Office Value Analysis maintains the view that London City and West End remain under-priced on a pan-European basis. As Brexit negotiations are finalised in the closing period of 2020, we anticipate a bounce in transactional activity. It is the speed of recovery from the coronavirus pandemic, rather than global geopolitical events which will be the main linch-pin for growth over the next 12 months.

There remains an imbalance of willing vendors for core product, although throughout 2021 we do expect lower levels of international capital, reflected in a 'flight to familiarity'. Asia-Pacific bidding in core markets is less competitive than during 2019 as domestic prices appear cheap, although core European debt is more easily accessible.

Europe’s final quarter investment transaction volumes have traditionally marked a 48% increase over the average of Q1–Q3 quarterly investment volumes. This could be of particular relevance to Dutch investors, where the real estate transfer tax on commercial transactions will rise from 6% to 8% and on residential from 2% to 8% from January 2021. For this reason, we are maintaining our European investment volumes forecast of between €220bn and €260bn during 2020, down 15–30% YoY.

_{Read the articles within Spotlight: European Investment 2020 below.}