The latter part of 2009 may see a more substantial return of equity-rich investors to the market, with yields increasingly seen to have peaked in locations such as London and Paris, reported international property adviser DTZ in its latest European Quarterly research.
This will be associated with some recovery in European investment market turnover, though falling capital values and smaller lot sizes may mean the value of transactions over the year is little changed, or somewhat down, on 2008 at around 100 bln.
Although outward shifts in yields and falls in capital values generally have further to go, markets are moving towards 'fair value' and this will provide a window of opportunity to those equity-based investors able to capitalize, reveals the research. Core assets, let on strong covenants with a relatively long unexpired term, are likely to remain investors' primary target.
The ability to acquire assets close to the bottom of the cycle will be restricted by the availability of product and limited liquidity. Those investors able to enter the market, however, will face reduced competition or may be able to selectively acquire assets off-market.
DTZ believes the downside risks of further limited falls in capital values in the short term is worth the pain against the backdrop of much larger peak to trough falls and the expected longer run performance enhancement, given competition will be greater in the upswing.
2009 will be the year when the European economy feels the full brunt of the problems in the financial markets which began in August 2007.
All the major European economies are now in, or close to, recession and this is set to deepen over the first half of this year. Those economies most exposed to deflating bubbles in residential and commercial real estate markets, such as Ireland, Spain and the UK are perhaps most susceptible to a 'hard landing' with countries such as Greece and Portugal also vulnerable to growing budget deficits and loss of competitiveness within the euro zone. A sharp correction is inevitable in those Central and Eastern European (CEE) economies most exposed to foreign debt, while growth in the CEE area as a whole will inevitably be affected by the slowing in export demand underway in the euro zone.
In conclusion, 2009 is therefore set to be another difficult year for European real estate, with the correction in investment markets which was the dominant story of 2008, being reinforced by weaker occupier markets as the repercussions of the credit crunch extend beyond the financial sector to the wider economy. Nevertheless, opportunities will emerge for those best placed to capitalize, DTZ believes.