Improving economic conditions across continental Europe, including falling unemployment and higher consumer confidence in the face of moderate inflation, should continue to support revenue growth for developers in 2019. The housebuilding industry is at the moment under a significant paradigm shift, as new trends pop up in the sector on a constant basis. In EMEA, the outlook is generally stable with new-build and presale indicators benefitting from the current upturn in the European economy.

Here’s a look at some of the factors that could affect the industry based on S&P Global Ratings.

• Key assumptions

1. Strong housing market in Germany. Nominal house prices in Germany surged across the country by about 4.8% on average in 2017, the fifth consecutive year of strong price growth. We expect residential property prices in Germany to increase by 3%-4% this year and in 2019, and annual growth to stabilize around 3% thereafter. The economic environment in Germany supports house price growth. Despite land scarcity in city centers, German zoning regulations, and rising construction costs associated with demanding environmental regulations, new supply should reach 300,000 units in 2018 and again in 2019.
2. Slowdown in the UK. The structural undersupply of housing and government schemes such as the Help to Buy (HTB) program continue to support demand for new homes, in particular in the midrange and affordable housing segments–for which these schemes may account for one-third of overall demand. HTB was extended until 2023 as part of the 2019 budget discussions. Nationwide, we foresee a moderate 1%-5% drop in average house prices in 2019. U.K. homebuilders could be affected by the Brexit fallout if demand for new homes starts falling more as purchase decisions are delayed and house prices decline on the back of market uncertainties.
3. Recovery underway in France and Spain. Market conditions in the rest of continental Europe, especially in France and Spain, are recovering. We expect the trend to continue as long as positive macroeconomic trends combine with sustained penetration of highly affordable mortgage loans, as planned throughout 2019. In France, we expect house prices to increase by 2.7% this year and 2% in 2019, as households continue to benefit from low interest rates and a resilient economy that is driving strong job creation. In Spain, the strong economic situation, with unemployment declining and low interest rates, supports the ongoing recovery of the housing market. We expect prices to increase at an annual rate of 5.6% in 2018, down from 7.3% in 2017, and further decelerate to 4.3% in 2019.

• Key risks and opportunities

1. Brexit U.K. developers may be affected by stagnating or falling valuations in certain areas like London as the implications of the Brexit process, especially for the financial industry, become clearer. We believe that Brexit will give financial services firms, already under pressure to contain costs, more reason to consider reducing office space in London. We expect the pressure to be most acute for offices in the City of London or high-end residential properties in London, market segments that have cooled in 2018. As a result, we expect development of commercial properties to slow in the U.K. next year.
2. Political tensions in Spain and in Italy. In Spain, political tensions surrounding Catalonia’s calls for independence have hindered development activities. Persistence of political tensions in Catalonia would likely affect the office real estate market in the region the most. Residential, logistics, or retail segments, influenced by consumer spending more than corporate sentiment, should prove more resilient. Annual 6% growth in home prices in Barcelona compares poorly with the 18% in Madrid this year. Growth in Catalonia might further be contained by political uncertainties throughout 2019. In Italy, tensions between the Conte government formed in June 2018 and the EU commission around the 2019 budget do not bode well for funding conditions, including for domestic homebuilders.
3. Indirect commodity price dependency in Russia and the GCC Prospects for developers in Russia and the GCC will continue to depend on the state of those economies, partly driven by the oil and gas price environment and currency movements (see Industry Developments below).

• Financial policy

In Europe, debt reduction for homebuilders is moderate because of limited free cash flows. But increasing revenues from project deliveries should sustain credit ratios in 2019. We also note that most developers have high interest rate hedging and took advantage of recent favorable market conditions to extend their debt maturity profiles. Debt for large rated U.K. homebuilders remains low, providing some buffer in the uncertain context of Brexit.

Source: Report – S&P Global Ratings