European commercial real estate investment: setting a low base for recovery (EUR)

Cushman & Wakefield has presented its European commercial real estate investment update. The highlights are:

  • Trading volumes fall to €11.4bn in quarter one, 74% down on the same period of 2008.
  • Prime yields rose 28bp to 7.5%, their highest level for nearly 5 years and 139bp up since 2007.
  • Occupier markets are increasingly negative, with rents down in 24 of the 32 countries examined and by 14.5% overall (annualized Q1 growth), led by falls in the East.
  • Nonetheless, early signs that some investors are now ready to act – led by interest in the UK.
  • But how much equity is available and will the stock be there that investors want to buy?

Investment activity
Investment volumes in the first three months of 2009 fell 74% on the opening period of last year, registering a total of just €11.4bn across the region, with no market unscathed. Unsurprisingly, prime yields rose further and the market was also hit by an acceleration in the decline of the occupational sector, with rents under pressure in most areas. The combination of these factors left capital values across Europe down 18.5% over the year.

Trends within the market were similar to late 2008, with foreign investors pulling back faster than domestic buyers, taking just a 29% market share in the quarter, down from 43% last year. Virtually all countries saw a similar pattern, with major markets such as Sweden, the Netherlands and Russia seeing no significant foreign buying at all. The only exceptions were Italy, which saw an increase in foreign buying after a very weak fourth quarter, and the UK, where a steep fall in pricing and Sterling, as well as the increased availability of property as companies and institutions have needed to make sales, have combined to make the market a key focus for many of the international buyers who are in the market. While domestic buying in the UK dropped by 41% - in line with wider European trends – foreign buying increased 147% on the final quarter of 2008. Nonetheless, activity in the opening quarter from foreign players was still down on the same period of last year (by 54%).

Whilst domestic buying is down significantly on early 2008 levels, a number of markets are reporting renewed interest from some domestic high net worth individuals and families, as well as local institutions. These are often investors who have been out of the market for a number of years due to competition from foreign and debt backed buyers, but who now see attractive opportunities to invest, often for assets which may rarely come to the market, albeit often in smaller lot sizes.

Offices remain the worst affected sector, seeing activity fall 57% on the last quarter to just 38% of all market activity, the sector's lowest share since at least 2000. By contrast retail activity fell 22% and industrial 42%. Not all regions saw the same pattern, however, with office activity rising in Eastern Europe and industrial activity up in the Nordics and in Southern Europe – albeit in all cases from a low base in late 2008.

Performance trends
Rents fell in virtually all areas in the opening quarter as the recession bit deeper. On average, over the year to March, prime rents fell 4.1%, the first annual decline since 2003, but, in the first quarter alone, they fell at an annual rate of 14.5%. Offices remain under most pressure with rents down 19.3% pa in the first quarter, versus a 12% drop for retail and 9.5% for industrial. Emerging markets very much led the fall, with Eastern Europe seeing a fall over the quarter of 52% pa, versus 14.4% in Central Europe, 15.2% for the UK and 6.2% in the rest of Western Europe. Aside from the UK, the most affected Western markets to date are Finland, Greece, Ireland, Norway and Spain.

Yields moved out sharply across the region but the pace of change was not quite as marked as in the final quarter of 2008. Western European yields rose 18bp, compared to a 30bp rise in late 2008 – but much of this reflected a stabilization in the UK. Excluding the UK, Western yields rose 20 bp (ver

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