Following a record 2004 â" when around â¬90 billion of direct real estate investment occurred in Europe â" in 2005 Jones Lang Lasalle (JLL) expects relative out-performance of property as an asset class again, positive yield gaps and increasing transparency in new markets to continue to drive investment momentum. This reveals from JLLÂ´s European Research Outlook 2005.
Any bottom up assessment of likely investment volumes suggests the number of transactions this year could be constrained by limited product, but with the continued attractions of the asset class we will not be surprised to see the volume of real estate investment at similar levels to 2004.
Commercial real estate
All commercial real estate sectors offer opportunities. Retail is expected to remain the sector of choice for many investors this year. The acute lack of product available to retail investors â" especially prime space â" will lead to some unsatisfied investor demand and even keener pricing. The office sector is coming back and will attract investors looking to the upswing in the rental cycle and offer improved returns from those seen in the last three years. Another sector set to see strong investor interest in 2005 is hotels, which is becoming more mainstream for investors. Demand in 2004 culminated in around â¬3 billion of single asset hotel transactions in Europe and JLL forecasts that 2005 investment volumes could exceed this level. Warehousing offers high yields and prospects for yield compression in a sector throwing up opportunities due to changes in European distribution networks. JLL expects this sector to continue to attract positive net investment.
New eastern states
Across all sectors, more money is expected to target Germany, Central Europe and Scandinavia. Corporates â" especially those in the retail and logistics sectors, but also office occupiers offshoring â" have already advanced into the new eastern states of the European Union, and further afield. The development of these markets is improving transparency for investors, already attracted by the prospect of extraordinary returns. In 2005 JLL expects to see investment markets consolidated in Poland, Czech Republic and Hungary and the first substantial signs of investment markets developing in Russia, Turkey, Slovakia and Romania.
While France and the UK will continue to be the largest investment markets in Europe, JLL expects volumes here to be below 2004. In the UK high borrowing costs relative to the Eurozone and significant weight of money that has targeted the UK market in recent years is encouraging some investors to seek opportunities elsewhere in Europe. In France, 2004 investment volumes were boosted by a surge in transactions from property companies influenced by one-off conversion to SIIC status, and transaction volumes in 2005 are unlikely to match last year.
Opportunistic investors were circling Germany in 2004. JLL expects 2005 to be the year when opportunities begin to be realised. Real estate capital values have fallen as yields have moved out and rents have declined. Hardest hit has been the financial sector and therefore offices, illustrated in Frankfurt where vacancy rates could reach nearly 20% this year. With German open-ended funds looking to sell some of their domestic holdings in 2005, JLL expects Germany for the first time to start firing as a competitive cross border investment market.
Private money (individuals and syndicates) was the main story behind the buoyant property investment markets in 2004. In 2005 JLL expects institutions to be more aggressively competing for investment product. In addition, more international players are expected to appear on the European investment scene â" including US REITs. Global investment markets in real estate are becoming a reality, and JLL expects to see more inter-regional flows in 2005.
Positive yield gaps look set to remain a feature of the 2005 investment landscape. Interest rates are low in the UK, and lower still in the Eurozone. Wit