Eurozone - Investors sail into east Europe headwind, says RICS

Foreign property investors are piling into the European market as confidence in the region's economic recovery continues to grow, says RICS Global Property Survey.

Fierce competition for prime assets in the established European centers continues to drive cross boarder investors eastwards despite the added risks associated with second and third tier cities.

With yields still above borrowing costs in much of the Eurozone, debt backed funds have remained active although an eastward shift in the market has eaten into available supply.

Industrial property has seen the biggest global re-rating amongst investors with the US slowdown impacting less on global exports than previously feared. The easing of the US economy has failed to hold back expansion in tenant demand across emerging markets, resulting in swathes of money continuing to flood into the more speculative regions.

In Germany, Ireland, the Netherlands and France, investor demand activity picked up further across all three sectors (retail, industrial and office sector) with transaction activity in France and Germany most buoyant in the office market. In Spain, investor demand moderated in the retail market although picked up across other sectors. Only Italy and Switzerland saw more limited transaction activity due to new laws on the transfer of real estate ownership (Italy) and limited supply of product (Switzerland).

Growth in activity was driven notably by cross-border investors attracted by the belief that a sustainable recovery of the European economy is on track, with economic growth at 2.8% in 2006 the highest in 7 years. Foreign investors continued to dominate purchasing across most countries in the region with the exception of the UK, Ireland, Greece and the Iberian Peninsula, where domestic investors are the most active players.

RICS believes that investor interest in European real estate will continue to gather pace attracted by positive economic growth prospects which should bolster the euro and hold up demand from cross border investors over the next year. Furthermore, low long term interest rates and a still positive yield gap have encouraged investors and occupiers alike, even as short term rates have risen.

Although rental growth in Western Europe is still lagging behind other world regions, tenant demand continues to rise ensuring tighter market conditions. Availability of commercial real estate is declining and rents are picking up, notably in Germany, Spain, Switzerland and the UK.

Business property demand and rents are rising at the fastest pace in emerging Asian markets, although were closely followed by Eastern and central Europe. Among the emerging European countries, Slovenia and Bulgaria experienced the fastest growth in rents. Strong interest ahead of joining the European Union saw Bulgaria and Romania experiencing a rapid pick up in purchasing activity in Eastern Europe.

Oliver Gilmartin, RICS Senior economist, adds, "The continued integration of emerging economies and positive economic expansion made Europe the star performer for purchasing activity growth in the second half of 2006. Limited supply in the less mature markets has driven yields down at the fastest pace of any global region as cross border investors continue to dominate the market.

Capital values across emerging Europe are expected to rise at the fastest pace of any global region as competitive pressures on purchasers drive yields still lower. Despite rising short term rates, longer term borrowing costs remain low aiding business expansion with improved economic sentiment set to continue."

Source: RICS

Click here to read the report.

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