Commercial Insurance Articles
European property: A tale of two sectors?
19 Jun 2009
It seems to be a tale of two sectors when it comes to European property investment at the moment, with figures showing a continuing decline in values, occupation and sales in commercial markets, while residential insiders report increases in enquiries and interest from second-home buyers.
Last month, research by Jones Lang LaSalle found that direct investment in European commercial real estate was down 30 per cent in the first quarter of 2009, compared to the previous period.
According to the firm's figures, €12 billion (£10.5 billion) went into the sector between January and March this year, a decline of 70 per cent from the same period in 2008.
Central and eastern European markets were particularly badly affected, accounting for just five per cent of total investment volumes, compared to core western sectors.
The UK commercial real estate market faired better, with investment up by four per cent to €4.4 billion compared to the previous quarter, as buyers took advantage of the weakness of the pound against the euro and the dollar.
Transactions in the central London market were mainly responsible for the upturn, with investors looking to make the most of some of the best deals seen in the capital for years.
Central and eastern Europe - including Russia - accounted for just €536 million worth of transactions. Germany suffered a 50 per cent drop in deals, with just €1.6 billion generated from commercial property sales during the period as domestic investors, who have not been forced into distressed selling, adopted a 'wait and see' attitude.
Tony Horrell, head of European capital markets at Jones Lang LaSalle, said there was reason for optimism in that the company has seen improving sentiment and increased bidding in recent months, with investors looking for high quality and good income over the long term.
"However here is a lack of good prime product and at the same time the accepted definition of the prime asset class has narrowed considerably," he explained.
Mr Horrell said that yields in many markets remained stable, highlighting consistency in London, Amsterdam, Frankfurt, Hamburg, Munich and Paris.
"This genuine interest from some investors is a positive sign but only time will tell if key deals will sign in the coming months," he added.
Michael Rhydderch, head of the cross border capital market at real estate advisor Cushman and Wakefield, said the figures reflected a lack of action from European countries in reducing prices to reflect the state of the economic climate.
"Whatever cross border money there is - money that is not focused on the domestic market - has focused on the UK, if it's buying at all, and there is a consequent reduction in activity in continental Europe. Until continental European prices adjust further, I think the activity will remain subdued," he asserted.
"There is not enough stock available at prices which the money is willing to pay for. There is certainly enough stock and lots of people would like to sell at 12 months or 18 months ago prices, but there are certainly very few people who are motivated, forced or obliged to sell at present day prices - which reduces volumes."
"[The European market] will have to follow what the UK went through, which is reacting to reality rather than living in the past, with the consequent pressure that this will bring to some companies to sell and to raise cash and to perhaps some of the open-ended continental European funds," Mr Rhydderch suggested.
Lloyd Lee, director at Marathon Asset Management, said that there might also be a reluctance among property investors to return to the European real estate market due to the uncertainty about when the sector will bounce back from the recession.
He predicted that many buyers would hold off until there were stronger indications of recovery, although he also thought more experienced purchasers would choose discreet investments in the coming months.
More recently, figures from the Royal Institution of Chartered Surveyors have revealed pessimism among real estate agents in Europe, particularly in France, the Netherlands and the Republic of Ireland, where confidence in the price outlook for the near-term was at its lowest.
The results of the Global Commercial Property Survey reflected the research from Jones Lang LaSalle, showing that central and eastern Europe was the worst performing emerging market region in terms of capital values during the first quarter of the year.
All respondents in the Ukraine, Russia, Poland and Croatia reported a fall rather than a rise in prices between January and March 2009, while eastern Europe as a whole showed the sharpest declines in occupier activity.
However, Christopher Bell, managing director of Knight Frank Europe, predicted that it could take up to a year for the continental market to reach a nadir.
"The UK is getting closer to the bottom in terms of value, where people are beginning to feel more comfortable that tomorrow is not going to be demonstrably cheaper than today. Europe still has a little more to work on," he said.
On the other side, residential property sellers have reported an increase in enquiries in recent months.
Primelocation.com reported a 14 per cent rise in the number of people searching for real estate abroad, with Spain making up 31 per cent of all enquiries and France accounting for 25 per cent.
Adam Samuel, director at Nubricks, said his company had also seen the same trend emerging.
"I think it is now the situation where people are looking for alternatives to invest their money [in] compared to the stock market," he explained.
"Banks' savings rates are not great and other investment vehicles are to be less trusted because of the media coverage they have been given. I don't see it as a surprise at all to be honest," he concluded.
Liam Bailey, director at Write About Property, suggested that the nature of investment in second homes and holiday accommodation overseas has changed as a result of the credit crunch, with buyers now conducting more of their own research.
"There is a lot of speculation [that] basically people were buying properties as investment on the words of certain people and a lot of people came unstuck," he stated.
