ING REIM sees broad-based recovery in European prime property rents from 2011, but economic concerns remain (EU)

The decline in prime yields seen in major European commercial real estate markets this year, in anticipation of a recovery in occupier markets, could be justified by a genuine turnaround in 2011 but significant economic threats remain, ING Real Estate Investment Management said in its latest European View research report.

Eugene Philips, Managing Director Research & Investment Strategies at ING REIM Europe said: "Prime rents have stabilized or have begun to recover for the best buildings in select markets and a more widespread recovery is expected in the coming year. This apparently benign picture for prime space, however, masks the still present rent incentives, and also low occupier demand for below-prime properties."

Philips added that the initial boost to the European economic recovery from exports, needs to be underpinned by domestic demand to be sustainable, but in this respect the outlook is modest as consumers are not yet ready to open their wallets as they are confronted by major uncertainties surrounding future household income. Overall, the outlook is brighter for real estate markets in France, Germany, the Netherlands and northern Europe than for markets in Southern Europe.

"We are most positive on relatively stable retail investments in most regions of continental Europe, on prime offices in France and on high quality industrial properties, particularly in France and Germany," Will Rowson, Chief Investment Officer at ING REIM Europe said. "Given their solid fundamentals, several residential markets could also be interesting for investors from a risk/return perspective," he added.

European retail markets
European retail has proved to be a resilient property sector in the crisis helped by the consistent income return provided by a diverse tenant base. Retailers are very cost conscious and stores are still being closed. At the same time, retailers are looking for prime locations coming on the market to boost their market share and raise their profile and market power.

ING REIM said that market conditions in prime retail locations are now coming into balance, although there is a clear divergence with secondary markets where the outlook is far more uncertain.

The research report's top European retail market picks for the 2010-2012 period are outlined in the table below on a risk-adjusted basis, according to ING REIM's proprietary risk model, and also on an absolute return basis.

European logistics markets
The outlook for European real estate logistics markets is cautiously positive as prime transaction yields are compressing faster than expected and conditions in the occupier markets are showing signs of stabilization as vacancy rates have stopped rising. This should allow some modest rental growth in supply constraint markets going forward, with further support for both prime headline rents and prime yields provided by the limited development pipeline.

Demand continues to be focused on state-of-the-art logistics properties both in the occupier and investment markets and assets of secondary quality are expected to underperform.

ING REIM's top performing picks for the European logistics markets in the 2010-2012 period on a risk adjusted and total return basis are outlined below:

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