The spread between European property yields and the "risk-free rate," or the yield on government bonds, is well above its long-term average, which historically has been a strong signal for investors to move into bricks and mortar, ING Real Estate Investment Management Europe (ING REIM Europe) said in its latest European View research report on the market.
However, storm clouds in the form of a possible failure of the Eurozone's recent 750 billion safety net to secure the fiscal positions of countries on its southern and western peripheries, along with currency market threats to the euro, could undermine Europe's fragile economy recovery. This would also curtail the relatively positive outlook for prime real estate markets. The prospect of a large volume of maturing debt in the next three years triggering distressed sales of properties by banks will mainly be a challenge for secondary markets.
Eugene Philips, Managing Director Research & Investment Strategies at ING REIM Europe said: "The coming quarters will show whether the rescue package is sufficient to have a lasting effect on confidence and if the countries under scrutiny will initiate the required fiscal discipline and reforms. If not, real estate markets in Europe might face renewed headwinds."
But he added that the picture for major European real estate investment markets continues to look attractive, as alongside the positive yield spread of property over government bonds, ING economists are forecasting positive growth in most European countries again.
Philips said: "Modest economic recovery will support property occupier demand from 2011 onwards, which should underpin the momentum of the upturn that has been led, so far, by the real estate investment markets."
ING REIM Europe's research indicates that the European retail and logistics property sectors look more appealing than most office markets over the 2010-2011 timeframe due to their proven defensive qualities -- notably the high and stable income component in investment returns -- during the economic crisis.
Office markets are attractive for investors seeking higher returns for a commensurate increase in the level of risk. For each sector the "Top Three" prime real estate investment markets are identified in each European Sector View (see below).
Key conclusions
The key conclusions of the European View for the three main property investment sectors are as follows:
European Office Markets
· After a synchronized downturn European office markets enter a phase of increasing disparities, which offers opportunities in selected parts of the market.
· The European labour market is expected to level off during mid-2010, but a strong rebound remains unlikely in the foreseeable future.
· Despite early signs of rent recovery in London and Paris, further rent declines are expected for most other major markets during 2010. Recovery will become more widespread in 2011.
· After a relatively strong rebound in 2010, yield compression in Western Europe is expected to slow down in 2011 and to remain limited in 2012. Central and Eastern European office markets are forecast to benefit from an inflow of foreign capital in search of attractive yields, when Western European yield declines slow.
"Top Three" Prime European Office Markets:
1. Prague
2. Paris La Défense
3. Brussels
European Retail Markets
· Retail property markets are expected to follow the economic recovery. Due to ongoing economic uncertainty, however, retail drivers are expected to remain weak throughout the year, potentially delaying rent recovery.
· Online retailing is still growing and is expected to gain further market share.
· The investment market is recovering ahead of the occupier market. Yields for prime properties are expected to decline further. Investors are still careful, interested mainly in core retail markets and prime and dominant shopping centres in local areas.
· The market return outlook will be more favorable for prime shopping centers and high street unit sho
