European property markets resilient in the face of uncertainty (GB)

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150 real estate investors about European real estate markets at Knight Frank’s annual European Breakfast:

 

Almost 40% of those polled saw demand for European commercial property being much or slightly stronger in 2017 with a similar proportion believing that there will be a further hardening of yields as a result.

 

* Geographically, Core Europe remains alluring with a quarter of respondents viewing Germany as their preferred investment market, while more than 1 in 10 regard Benelux as a target market.

 

* As investors search for value, and as economic fortunes in Europe’s peripheral markets further improve, 15% of respondents also viewed Spain as being firmly in their sights.

 

* More than a third of respondents chose Industrial & Distribution assets as their preferred sector – reflecting, in part, the strength of underlying occupational demand as retailers continue to overhaul their supply chains

 

* Second, the specialist asset classes – hotels, healthcare, automotive and student accommodation – are being targeted by almost a quarter of those investors surveyed – reflecting an appetite for diversification and income security as well as a means of accessing assets that will benefit from longer term structural shifts in Europe’s demography.

 

About Brexit: more than half of the investors surveyed believe that the exit of the UK from the EU will bring an increase in European leasing transactions while a further third saw no tangible impact in Europe’s occupational markets.

 

Occupier Markets

 

A number of European markets are now seeing prime rental levels at a 10-year high – notably the major German markets, Stockholm and Amsterdam. However, prime rents remain below their 10-year highs in a substantial number of other markets, suggesting that there is significant rental growth potential before new market benchmarks are achieved. Madrid, Prague and Warsaw are all notable in this respect while Paris is still short of that 10-year high-water mark.

 

Knight Frank has observed increased demand for office space in Tier-2 cities on the back of the primacy of creative and tech industries. Particularly dynamic take-up trends have been seen in cities such as Berlin and Dublin, as well as in markets such as Warsaw and Prague, which have benefited.

 

Capital Markets

 

Knight Frank predicts further capital growth across a number of major European markets.

 

While the pace of yield compression is expected to slow, there is room for yields to harden further in specific markets, as part of an on-going adjustment to the current low interest rate environment. Prime yield compression is most likely in those markets that have a slight delay in performance, such as Amsterdam, Berlin, Dublin, Madrid and Stockholm.Investment transactions in Germany, France and the Netherlands may slow due to hesitation over elections in 2017; however, as with the Scottish and Brexit referendums, this may only be a temporary slowing of activity before the markets recover.

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