The European commercial property investment market saw €59.6bn of
assets traded in the second quarter of 2007, 5% up on the first
quarter’s total of €55.7bn, and nearly 23% higher than the same period
in 2006: the record year to date for commercial property trading in the
region. The figure for the first half of 2007 stands at €115.3bn.
Cushman & Wakefield also predicts that this trend will continue,
with total trading volumes for the year now predicted to exceed €243bn.
Foreign investors are in the ascendancy, with their share of the
pan-European market rising from 42% in the first half of 2006 to 58% in
the first 6 months of this year. “In a number of markets, local
investors have stood back but foreign players have been more than
willing to take their place” commented Michael Rhydderch, head of the
Cross Border Capital Markets team at C&W, “We’re seeing strong
demand in particular from Middle Eastern, Irish, Australian and
American investors who are using little debt and are looking for long
term, secure performance.” Spanish buyers are also strongly in
evidence, in core Western markets as well as Central & Eastern
Europe, while German buyers have made a notable return to the
acquisition trail.
The UK, Germany and France remain the top markets for investment,
accounting for 69% of property traded in the last quarter. “Trophy
assets have been in particularly strong demand” added Rhydderch, “with
Paris, London and now German cities subject to strong interest for top
quality, prime buildings and other European capitals seeing a similar
trend emerging.”
However, the research cautions that performance levels for most markets
have now peaked – with yields largely stable in the second quarter –
and with a marked degree of turbulence in the wider investment market
globally, investors are growing more cautious over pricing and are
focussing on assets that can deliver sustainable income growth.
“For the last few years it’s been easier to make money than lose it in
the real estate market” commented David Hutchings, head of European
Research at C&W, “but now we’re in a new environment and investors
need to focus closely on the fundamentals if they are to make
successful investments.”
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In the first 6 months this year, prime yields across Europe, East and
West, dropped by a further 16 basis points but the fall in the second
quarter was minimal (just 2 bp). In secondary markets meanwhile, yields
have risen as investors focus more on quality assets. The UK has seen a
25-50bp rise while other areas of Europe have seen a 10-25bp increase
for weaker stock. “Higher borrowing cost and bond yields are
undoubtedly impacting on investors” warned Hutchings, “but equity
investors have the upper hand and current prime pricing in a market of
rising rents is not a concern so long as bond rates don’t move back and
stay at a higher rate.”
Debt-backed buyers meanwhile are being forced to consider riskier
propositions to reach the returns they seek but in the wake of recent
concerns in the global credit market, tougher bank lending criteria are
emerging. “Riskier, highly-leveraged deals are going to remain
difficult to put together for at least the next few months” cautioned
Rhydderch, “ however the volatility of the financial market generally
is reminding investors of the rationale for including property in their
portfolio, e.g. lower risk and a secure, relatively long-term income
stream. Hence whilst the flight to quality may continue, we’re
optimistic that demand for the sector is set to remain strong.”
Prime rental growth accelerated to 8% in the year to June, led by
strong increases in both office and retail markets. Central Europe saw
the best office market growth, at 18%, while Eastern Europe was ahead
in both retail and industrial markets.
“With a stronger level of activity in the underlying economy we expect
prime European property to continue to see good rental growth this
year” said Hutchings, “and even though economic growth may ease in
2008, a shortage of supply and higher building costs will combine to
deliver further very respectable levels of rental growth going
forward”. C&W’s current all-sector prime rental forecasts are for a
7-8% rise this year and a 6-7% increase in 2008.
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