According to the latest EY Eurozone Forecast sector overview, the construction sector is picking up after falling by around 20% across Europe since 2008. EY forecast shows a gradual recovery taking place from 2014, starting in the core Eurozone countries, although there are positive signs for the sector in the peripheral countries.

Two factors are likely to reinforce a nascent recovery in Eurozone construction and real estate in 2014.

With central bank lending rates at record lows, property is an asset-backed investment with an appealing yield - and many pension funds and institutional investors are underweight in real estate.

Demographics and changing consumer behavior will enhance the appeal of the right properties in the right cities. It will take some time for the sector to recover, so we forecast construction output to grow by just 1.4% a year in 2014-17, which, in 2017, would still leave it 18% below its 2007 level.

The European construction sector is expected to pick up by 1.4%, while lending rates open opportunity

Public-private partnership a possibility

Yet Europe badly needs infrastructure renewal and development, especially in some of its biggest cities. Some governments, especially in southern Europe, are now turning to the private sector to finance infrastructure investment.

Though public-private partnerships remain underexploited, privatization programs are creating opportunities for investors, and are a route to increased investment. In the meantime, while some overbuilt southern countries suffer from a surplus of seaside residential property, many northern European cities, especially those of the Nordic countries, have shortages of homes.

Rentals for prime offices in Germany and part of the Nordics continued to rise in 2013, and falls in southern European cities are leveling out. Prime yields of around 4%-6% make commercial property an attractive investment in several leading Eurozone cities at a time when many pension fund managers and other investors are seeking investments.

Yet changes in communication technology and more efficient uses of space by corporate occupiers suggest demand growth may remain weak.

Changed consumer patterns

At the same time, the retail property market is being recast by changing consumer behavior and ever-increasing online sales. Demand from luxury retailers for premium city-center locations remains strong. Declining car ownership, especially among young people, strengthens the appeal of local shopping centers with good public transport.

Big malls with lots of restaurants and leisure attractions are also thriving. But retail sites relying upon cars for access are losing out as a lot of routine retailing moves online. This is driving increased demand for well-connected, centrally located logistics centers and city-edge national relays.

2014 Feb, 20