According to the latest update from Cushman & Wakefield, European commercial property was buoyed in Q1 by further growth in demand, particularly from foreign players, improving debt market sentiment, increased interest in larger lot sizes and by a spreading of interest to new areas. While demand is still heavily focussed on prime assets and core markets with 75% of trading in the top 5 of the UK, Germany, Sweden, France and the Netherlands - a number of other markets are coming back to life, such as Poland, the Czech Republic, Norway and to some extent Turkey.
Investors clearly remain selective and alert to macro as well as local factors but despite the meltdown of Greece, risk appetites have improved and well-balanced markets will at least be considered. Despite this, with limited investment supply and finance not yet affordable in all areas, activity is not accelerating as fast as it might. Volumes in the opening quarter were 15% down on the final three months of 2009, although it should be noted that the opening months of the year tend to be quieter, with investors under less pressure to close deals and activity typically 10-15% less than in the usually busy final quarter.
The market has in fact seen an all round improvement in the opening few months of 2010 but there are still issues barring a full recovery.
According to Michael Rhydderch, head of EMEA Cross Border Capital Markets Group at Cushman & Wakefield, "What we are seeing is an increasingly polarised and challenging market. Investment demand is rising and so is supply, but most of the new supply is not of the prime quality demanded by these buyers and pricing of non-prime assets is often still to high to compensate for the risk and the larger element of equity required".
The modest increase in availability of affordable debt is helping to reinforce a move towards larger lots however, as some investors look to escape the highly competitive market for small to medium sized lots and to get invested quickly ahead of the recovery. This has been one factor behind the increased activity seen in the retail sector, with more larger lots and shopping centre portfolios being traded. Retail accounted for 43% of all trading in Q1, up from 30% last year and at its highest in at least 10 years. Germany overtook the UK to become the largest retail market over the quarter, followed, albeit at some distance, by Norway, Italy and the Netherlands.
Retail is likely to remain strongly in favour as a low risk, low volatility asset which can deliver good income growth through careful management, with many investors also expecting a more rapid return of rental growth. Current performance trends have been quite uniform by sector however. Yield falls ranged from 11 to 13bp over the quarter for example while rental levels fell by just 0.1% for retail but only 0.3% for offices and industrials.
On a geographic basis more marked differences are being seen and investors need to stay alert to a polarisation in performance within Europe. The UK, Turkey and Sweden saw modest rental growth while Bulgaria, Irelan