Belgium economy avoids recession as investment expected to grow
The Belgian economy has avoided a recession, with decent business confidence indicators and improving employment providing fundamentals for market recovery while inflation slows down.
4 minutes to read
Here we provide a snapshot of how the Belgium economy and real estate markets are performing as well as expectations for real estate markets in 2023 and beyond.
Office markets
The office market is transforming into a two-tier model, evolving in different directions demand-wise, while demand remains healthy in logistics, although low supply remains a hurdle. Rents will therefore continue to increase in both segments.
The higher cost of money remains a concern but swap rates are seemingly not budging, and cash-rich investors should have the upper hand as the market will emerge from a “price discovery” phase, providing they are able to identify willing sellers.
Economics
Belgian GDP increased 0.4% in Q1 2023, against a 0.1% increase at the end of 2022; this also marks a 1.3% increase on the same period in 2022. GVA in the services sector increased 0.7% and industry and manufacturing increased 0.6% on a quarterly basis.
Overall, EU Commission figures forecast a 0.8% GDP increase in 2023 and 1.6% in 2024 as the domestic demand and an improving situation on the employment market (5.6% unemployment in 2022) provide decent market recovery fundamentals.
Despite the increase of confidence in trade and business-related services, the overall business confidence indicator only managed to stabilise in April, having risen sharply in March.
In addition, sentiment decreased in the manufacturing industry after four months of improvement – orders books and employment perspectives receded, although the National Bank of Belgium also states that stock levels and demand outlook are considered more favourably.
The Federal Planning Bureau forecasts inflation at 3.9% for 2023, and 3.3% in 2024, against a 9.59% rate in 2022.
On a monthly basis, inflation is expected to keep slowing down through October, before stabilising between the 3 and 4% bracket in 2024. In a bid to calm inflation, the ECB once again increased its rates on 15 June, by 25bps. Further increases will likely come later this year.
The lack of substantial movement on Belgian 10-year government bonds since then would indicate the extent to which the market appears to have anticipated and integrated this trend. If this is confirmed in the weeks ahead, a direct impact on the real estate risk premium may be relatively limited.
Grade A occupancy space in demand
The flight to energy-efficient office buildings by large occupiers explains the premium now paid on Grade A buildings.
This is especially true for buildings which are compliant with all aspects of ESG – all the more so if they have the certifications to show for it. This explains that other CBD districts are edging closer to Brussels’ prime rent of EUR 340/sq m/year – historically only found in the European district.
Additionally, landlords of Grade A assets are unwilling to offer spaces for smaller occupiers (e.g. 200 to 800 sq m). Therefore a dichotomy is emerging, where the Grade A market is a landlord market, while the Grade B and C market is a tenant market.
Regarding the latter, good Grade B spaces are encountering demand at reasonable rents, especially in the 200 to 800 sq m bracket. Demand for good Grade B spaces is reinforced by the fact that VAT is applied on recent Grade As, which clearly impacts large corporate occupiers’ decision process.
Lower grade offices have to contend with weaker demand, and in order to attract occupiers, owners of these assets may have to offer significant discounts on their rents given the higher charges attached to occupying inefficient premises.
On the logistics occupier market, demand remains healthy and large-scale projects are mainly only feasible in areas where some large plots are still available. A recent 65,000 sq m deal involving Kellogg’s on the highly sought-after Brussels-Antwerp axis does warrant a mention, revealing opportunities still exist for savvy developers.
Additionally, the just-in-case trend is making timid incursions on the Belgian market. Manufacturers are stockpiling to an extent, tying in with stock levels mentioned above, and potentially increasing surfaces occupied or provisioned by 3PLs. Upward pressure on rents is a reality and will manifest over the coming months. The Belgian logistics prime rent in Q1 was EUR 65/sq m/year.
Investment volumes expected to increase in H2
Any hope of a return to cheap money should be consigned to the past. Therefore, cash rich investors such as investment funds are expected to have the upper hand across all asset classes – that is, if they can identify willing sellers. Indeed, the investment pipeline is weakened, especially where offices are concerned.
Few owners are thought to believe the time is currently ripe to officially plant “for sale” signs outside their assets. Therefore, opportunistic off-market investment deals should play a key role this year. Assets related to logistics, semi-industrial, and life sciences remain highly sought after.
Investment volumes may not yet increase in H2 as investors continue to adjust to the new normal. Smaller investments and alternative asset classes are being examined of some quarters, while 2024 is already eagerly awaited.
However these volumes are not expected to be on a par with those of previous years, especially where office investments are concerned.
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