Eurozone break up concerns affecting Europe commercial property markets
24-09-2012
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Commercial transaction volumes fell to €46.8 billion in the first half of the year, down 19.4% on the first half of 2011 and while deal volumes have fallen around the world, Europe recorded the sharpest fall in activity of the global regions, it says. However, despite the fall in overall volumes, Germany and the Nordics have retained investor interest, while interest in the UK and France has been focused on London and Paris, which have seen buoyant demand from high net worth individuals and sovereign wealth funds in recent months. The report says that investor demand has generally mirrored wider economic trends and interest in the peripheral eurozone countries has waned, with investors pursuing a safety first policy.
Indeed, concerns about a possible break up of the euro area have acted as a significant deterrent to investors and, as a result, investment transaction volumes have fallen markedly in Italy, Spain, Portugal and Greece. On a positive note, there is some evidence that Ireland is now beginning to see renewed interest following a dramatic re-pricing, although this has yet to translate in to significant activity.
Pricing at the prime end of the market has generally held firm, although yields in Madrid and Milan moved up by 25bps in the second quarter of the year. Yields on secondary assets, in terms of location, covenant strength or quality of building, have continued to soften on the back of increased risk aversion. In the occupational markets meanwhile, overall take up at a European level has eased, although markets in Germany and Central and Eastern Europe have held up relatively well. Prime rents are being supported by a lack of supply as a result of limited development, but there is little if any evidence of rental uplift. ‘Investors are clearly concerned about the possibility of a eurozone break up and the recent sharp fall in activity in the peripheral markets reflects this.
That said, with property continuing to offer a significant premium over bond yields, the case for investing in real estate remains strong, particularly in the better performing economies, both inside and outside the Eurozone,’ said Darren Yates, partner in Knight Frank’s research team. Andrew Sim, Knight Frank’s head of European investment, said that the core markets have remained buoyant and none more so than in London. ‘Despite continued worrying levels of tenant inactivity, we have even seen prime yields harden under the ever increasing flow of international capital,’ he pointed out.
‘However, core product is scarce and this lack of product has encouraged some to widen their investment horizons and even take on a little risk for an appropriate discount. We believe this ripple is set to continue, with investors gently drifting towards more added value opportunities in the strongest markets, with a positive increase in core activity in the tougher European economies,’ he added.
