According to the latest research report produced by Invista Real Estate Investment Management, property values are expected to fall at a slower rate as the emphasis shifts from a capital to a leasing correction and parts of the European economy start to stabilize. The first six months of 2009 saw confirmation of the weakest economic conditions across the Eurozone since its inception.
However, interestingly, some forward looking indicators have now begun to stabilise or improve, albeit from very low levels. According to the ECB, European banks became less negative in their future lending intentions and, perhaps more significantly, the cost of finance in the Eurozone has fallen sharply from the peak levels of Q4 2008.
The divergence between falling bond yields and rising property yields could potentially increase the long-term attractiveness of property. The supply and cost of credit is likely to be a major determinant of the shape, strength and sustainability of Europe's economic recovery.
These are potentially positive signs that can be interpreted with cautious optimism. However, due to the scale and severity of the downturn in Europe's economy, activity in the property leasing market is likely to remain subdued until economic growth becomes more firmly established in 2010-2011.
In the short term, given the depth of the current economic downturn, we can expect property leasing activity to fall further, potentially bottoming out in H1 2010. Property price falls to date have been more influenced by the credit market than by the leasing market, however Invista expects that this balance will switch in the short-term, with the rate of value decline slowing as the effect of lower rents filters through to property values more gradually.
According to Invista's analysis, the UK is currently the only European country where market prices are considered to represent fair value. It points out that this is mainly due to the earlier and more substantial outward movement of property yields in the UK, compared to Continental Europe where the least developed and riskiest markets remain substantially below fair value.
Tim Francis, Director, Continental European Strategy & Research at Invista, commented: "With improved visibility on bottom-of-the-cycle valuations, we are in a better position to judge market pricing against fair value. This will assist in identifying attractive investment opportunities across these markets, some of which are experiencing distressed selling. The UK is currently the only market we consider to be around fair value, with France, Germany and the Netherlands still some six to nine months behind. However, this is entirely dependent on the quality of stock being traded. We expect deal flow to improve during H2 2009 as the other mature continental European markets catch up."
Source: FD / Invista