Key commentary from CBRE's forthcoming report After the Storm: Where Next for European Property? The economic aftermath of the collapse of Lehman in September 2008 has been well documented and continues to unfold. Against a background of extreme uncertainty, investment decisions froze and most of the world's major economies entered recession. Unemployment has risen sharply across Europe and is still rising; stock markets, asset prices and business and consumer confidence tumbled, and even now the flow of credit to businesses remains patchy.
The main elements of policy response were near-zero interest rates and state intervention roughly equivalent to a sixth of GDP in Europe and the US. Not surprisingly, these have had some stabilising effect. Recent economic data are more varied and suggest that some economies are resuming a growth path, albeit a gradual one. While many economies and real estate markets will therefore enter the new year with prospects apparently looking brighter than seemed likely even a few months ago, this has been a challenging year to say the least.
What sort of economic recovery will we see in 2010?
Estimates suggest that the major European economies will have shrunk by between 2% and 5% in 2009. There has clearly been some improvement since early 2009 when the Eurozone economy fell by over 1.5% in one quarter, and France and Germany proudly announced that their recessions ended in Q2, when the string of quarterly output falls was broken. We therefore appear to be past the low point in the economic cycle. While the risk of a "double-dip" remains real, a number of forecasters are now expecting a resumption of year-on-year growth early in 2010, and positive (if sub-trend) growth for most European economies in 2010 as a whole.
In addition, labour markets tend to lag changes in output and, with Euro area unemployment approaching 10% and still rising, this will act as a drag on recovery. The role of government policy is difficult to exaggerate in the current environment. Specifically, the timing of withdrawal from the stimulus programmes introduced this year, and tightening of monetary policy, will be critical: too early and it risks stalling the recovery; too late and growth may already have become inflationary. The steepness of yield curves at present suggests at least some concerns about inflation potential.
What has been happening to investment turnover?
In the first three quarters of 2009, we saw around 41 billion of investment activity in the European commercial real estate market. There has been a steady increase in activity each quarter since the low of 12 billion in Q1 2009, and we expect that this will continue, with Q4 seeing the highest level of activity for the year. Our expectation for the year as a whole is for a total of around 60 billion of investment transactions in Europe, which would be around half of 2008's total.
"The recent upturn in investment activity suggests that many investors believe the European market is approaching the bottom of the cycle; and in some cases, it may well be past that point. Whilst investment turnover has started to pick-up from lows of around 12 billion in both Q1 and Q2 this year, concerns remain about slow economic recovery and its lagging impact on the occupier market." said Michael Haddock, Director, EMEA Capital Markets Research, CB Richard Ellis
Will this recovery continue into 2010?
While deal flow is likely to remain subdued for a while yet, we do expect that the steady improvement that has been seen throughout 2009 will continue in 2010. The final months of this year have started to see more opportunities coming to the market and this will translate into higher levels of activity during 2010.
However, a feature of the investment recovery so far is that, other than in the UK, it has been heavily concentrated on "defensive" investments: well-let, well-located, modern buildings, secured to good covenants on long leases. In other words, it has been focussed on quality and duration of income, and explicitly base