Based on an analysis of economic trends and movements in prime rents and yields, it highlights that:
• Europe’s uneven economic recovery continues, but the risks of a Euro crisis remain
• Occupier markets have stabilised, with London and Paris leading the way in rental growth
• Investor demand has improved, but investors remain wary of risks and the limited potential for further prime yield compression
The research shows that most occupier markets across Europe have stabilised while London and Paris continue to lead the way in terms of rental growth. The office sector has seen the most significant recovery in prime rents with virtually all surveyed cities recording stable or rising rents in Q4 2010.
Available supply will tighten in certain markets across all property sectors, due to the near moratorium on speculative construction over the past two years. For example, London, Paris and Moscow are all seeing an increasing shortage of available grade A offices. In these markets there will be an opportunity for landlords to recycle and refurbish secondary stock and return it to the market in the next two years.
Investment activity rose significantly towards the end of the year with Q4 2010 recording the highest investment volume since Q3 2008. Nevertheless, investors remain wary of risk and remain focussed on prime, long-lease assets with strong covenants. As a result of this, prime yields across all property sectors recorded considerable compression over the year. However, in most parts of Europe prime yields have now stabilised.
Looking back over 2010, Alexander Colpaert, European Research Associate at King Sturge, and the report’s author, said:
“On a year-on-year basis, Moscow recorded by far the strongest rental growth in Europe as at Q4 2010, followed by London, Paris and Stockholm. Prime office rents in Moscow increased by more then 40% on the year, while prime high street and warehouse rents moved up by 11% and 9% respectively.”
“Dublin and Sofia recorded the worst rental performance in 2010. The occupier market in Dublin has been severely impacted by the economic crisis. In the year to Q4 2010, prime office rents declined by almost 19%, while prime high street and warehouse rents dropped by 28% and 19% respectively.”
“Investment activity rose significantly towards the end of 2010. According the preliminary figures from RCA, 2010 investment volumes were up by 24% on the year before. Just four of Europe’s top 15 investment market (by size) recorded a decline on 2009 figures. Sweden saw the most significant upturn in investment activity across Europe on the back of strong market fundamentals, with the total transacted volume up by around 240% on 2009. Nevertheless, investment activity across Europe remains well below the peak levels of 2007 with the majority of markets recording a dip between 60% and 80% compared to 2007 levels.”
Looking ahead this year, Alexander Colpaert predicts that:
“In the office and industrial sector one can generally speak of a positive sentiment as market fundamentals are improving, but the retail sector shows a much more mixed picture. Overall, consumer spending is being affected by rising unemployment and government austerity measures. Prime retail centres such as London, Paris and Milan continue to do well although even here any recovery in rental levels is marginal.”
“Occupier demand should hold up across the sectors as the economic recovery continues, albeit at a relatively sluggish pace for this stage of the cycle.”
“Prime office and retail yields seem to have bottomed out in most Western European markets and we expect these to remain fairly stable in the short term. However, certain CEE markets could see some further downward movement as the perception of risk for these markets declines.”
“The situation for Hungary follows the same dynamic as for all of Europe” commented Rémi Couture, head of research for Hungary. “Rents have stabilized and fundamentals should improve slowly in the office and industrial sector as speculative supply virtually stopped and some degree of economic growth supports the occupier demand. It is worth noting the competitiveness of our warehousing sector. Budapest reports the lowest prime rent of all the cities surveyed. The retail sector is still going through difficult time because of lower consumer spending and high unemployment. It is in the investment sector where Hungary diverges from the rest of Europe. The market remained illiquid in 2010. The details of the structural reforms announced for mid-February will be crucial to dispel the uncertain sentiment associated with Hungary.”
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