The size of the invested commercial property market in Europe has the scope to grow by around Ã¢âÂ¬ 70 billion to Ã¢âÂ¬ 1.9 trillion by the end of 2007, according to DTZ´s Money into Property - Europe report. The report provides a unique insight into the European real estate stock and capital flows and provides a detailed breakdown of the commercial real estate market, by investor type and source of capital for 20 countries.
The report estimates that the corporate and government real estate externalisation potential across the 20 European countries is around Ã¢âÂ¬ 70 billion over the next four years. This figure, which includes sale and leasebacks, outsourcing and pure disposals by both corporates and governments, compares with a figure of around Ã¢âÂ¬ 30 billion over the last four years.
Peter Collins, Head of Global Investment at DTZ comments: 'The market has largely been dominated by the opportunistic funds and going forward they will have more regard to covenant strength and the underlying asset value of the property.'
In a market in which many investors have cited lack of product as a barrier to portfolio expansion, real estate externalisation looks set to remain an important source of assets. All else being equal, this potential source of assets could raise transaction activity by 15% per annum on the levels seen in recent years.
The report also quantifies the importance of debt finance to the real estate market in recent years. Private debt outstanding to the real estate sector now exceeds Ã¢âÂ¬ 800 billion, with the German, UK and French debt markets accounting for more than half of this total. The most significant increases in debt outstanding to the real estate sector since 1996 were recorded in Spain (25% pa) and the UK (19% pa). Whilst falling interest rates, and the consequent increase in yield premium over finance costs,
are one of the key drivers of this growth (by encouraging higher loan to value ratios in both new loans and the refinancing of existing loans) a number of other factors have also contributed to this trend.
* an increase in the volume of investible stock, through development activity on the back of economic growth and through real estate externalisation
* an increase in the number and activity of private property vehicles, some of which have acquired substantial amounts of real estate with very high levels of gearing
* an increase in the number of public to private property market transactions, which is partly a function of substantial discounts to NAV
Over the same period, banks´ willingness to provide debt finance has been
* an increase in the number of lenders active in real estate lending
* consolidation in the banking sector and a consequent desire to gain market share
* the desire to reduce exposure to other sectors such as telecommunications and manufacturing to which the banking sector has beenrelatively over-exposed since the mid-1990s
* by issuing commercial mortgage-backed securities, banks can remove the debt from their balance sheets and increase reserves against which new debt can be issued
These trends have, to a significant extent, underpinned investment transaction activity at a time when deteriorating leasing market fundamentals have impacted on performance. The survey undertaken of lenders reinforces the strong appetite for the sector, with lenders expected to increase loan book sizes by approximately 14% in 2003. However, amid weak leasing market conditions - particularly in the office
sector - lenders are expected to be more cautious going forward. This, in turn, is likely to impact on investment activity and performance. In contrast, Money into property - Europe also indicates that investors plan to expand portfolios by 10% during 2003, and significantly increase cross-border holdings as a share of total holdings.
Collins added, 'We have witnessed cross border investment more than treble
over the last five years from Ã¢âÂ¬ 10 billion to Ã¢âÂ¬ 32 billion and this trend will certainly continue in the future.'
The report notes a potential mis