European Markets

2020 Special Issue

Photo: alecamera90/
Milan, Italy, 8 March, 2020: Victor Pisani Street in Milan. Northern Italy Locks Down To Try Prevent The Spread Of Coronavirus.

As COVID-19 spread rapidly across the globe, structural and cultural differences have lead to widely varying impacts.

We asked Hans Vrensen, CRE®:

What are the structural differences between the U.S. and European economies and real estate markets driving the COVID-19 impacts? Which sectors will be most impacted by the current crisis?

European Recovery

By Hans Vrensen, CFA, CRE®
Head of Research and Strategy | AEW Europe LLP

Structural Differences Between the U.S. and Europe

There are a number of structural differences between the U.S. and European economic and market structures that will drive the speed and depth of the COVID-19 impacts.

European labour market laws and some recently announced measures protect workers against unemployment more than in the U.S. Unemployment and health care benefits are more generous in Europe, potentially limiting the short term impact on consumer spending and economic growth.

European banks are providing more credit to companies and consumers compared to the U.S., where bond markets play a relatively bigger role. This might leave Europe more exposed to this traditional single source of funding. Despite remaining NPL exposures, stricter capital reserve regulations put in place after the Global Financial Crisis should better protect European banks from credit risks in the aftermath of the current COVID-19 linked economic downturn.

U.S. commercial real estate markets have typically been more aggressively levered and have a more active speculative development pipeline than European markets, which might lead to more severe short term stress. However, U.S. markets have proven to be more able to re-price during previous down cycles and react more pro-actively than European markets.

Most Impacted Sectors

Based on our scenario analyses across the prime European markets, high street retail and shopping centres will be most negatively impacted by the current COVID-19 crisis. Even before COVID-19, limited retail rental growth was projected. Their high level of historical rental growth sensitivity to GDP growth leaves these retail segments much more vulnerable than offices and logistics sectors. This is also confirmed by the increased speed of e-commerce penetration since the COVID-19 lockdowns and the evidence on rent concessions sought and obtained to date by retail tenants when compared to office and logistics occupiers. In our most current downside scenario, we see a limited impact on offices and logistics returns. This is mostly due to less declines in future market rents, fewer COVID-19 concessions and less widening of cap rates, compared to retail. Across Europe, we expect government bond yields to remain lower for much longer and supportive for the relative value of real estate.