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European commercial property investment - Market Update October 2010
10 Nov, 2010, Warsaw
A busy year end ahead as the market makes up for lost time after a slow summer
• Trading volumes hit €23.3bn in Q3, 12.5% down on the second quarter.
The latest figures from global property adviser Cushman & Wakefield show that the final quarter has got off to a flying start, with more willing buyers and willing sellers coming forward. If current momentum is maintained this quarter could total around €40bn, the highest quarterly figure since early 2008 and would take total for 2010 to just over €110bn.
Michael Rhydderch, head of Cross Border Capital Markets at Cushman & Wakefield, “If one had to generalise, it has been Europe’s smaller and more peripheral markets which have fallen behind over the past quarter as the sovereign debt crisis has added to the risk aversion which already held investors back from less liquid markets. The biggest markets have continued to fare well with only small falls in dealing volumes in the third quarter in the UK and Germany for example and gains in some regional middleweights such as Italy and the Netherlands. However, with the quality of stock investors seek still in short supply and some buyers also starting to get comfortable again with a certain level of risk, interest in other markets is steadily growing.
According to David Hutchings, Head of European Research at Cushman & Wakefield, “While market fundamentals of size, access and liquidity are of vital importance, investors are also paying more attention to macro issues than they have done in the past. There is in fact a very clear link between the markets investors are targeting and recent or prospective economic growth. Also, investors are also typically more keenly aware of macro risks than many appeared to be in the past.”
This does not mean they are completely risk averse. More investors are now ready to accept some degree of risk just so long as it is well rewarded.
“With European bond yields staying so low, and possibly set to fall further, the yield premium in prime property is a source of real strength for the sector and argues in favour of more demand” believes Rhydderch. “On average, Western European prime property yields 300 to 350bp more than 10 year government bonds and with occupational markets stabilising and supply constrained, prime yields must fall further.”
This will be supported to some extent by the modest improvement seen in financing conditions but at current levels of cost and availability, it is still inadequate to really boost the market.
Rhydderch continued, “Debt availability is largely limited to prime assets and margins vary widely between coutries. That said, banks are increasingly willing to fund development schemes providing a good level of pre-lets have been achieved"
In addition, while banks are more ready to lend on the right product, they are often still accused of being less than generous when it comes to refinancing old loans. This is helping to encourage more sales and according to Rhydderch “The banks are starting to deliver and remain the great hope for supply to the market but it is still reassuring that while more are pushing sales, this seems to be happening in a relatively orderly fashion”
Looking forward, Hutchings commented “Whilst we are seeing more supply as investors and businesses restructure, much of it is not prime and a mismatch between what occupiers and investors want and what is actually available could still stall activity. However, undersupply should focus more interest on near-prime markets, which, as well as having more availability, typically also have lower rents and higher yields. But that leaves two questions; will people compromise on location or build quality and who will compromise first – investor or occupier? On the former point the jury is out, but on the latter, investors may need to see the lease in place before they will act and hence as supply falls and rents rise, occupiers are likely to be the first to break cover away from prime.”
Łukasz Lorencki from Warsaw’s Capital Markets Group of Cushman & Wakefield, said “In Q3 2010 the situation on the Polish investment market reflected the sentiment prevailing on the European market. Transaction volume in that period reached approx. €655 million, an over sixfold increase on the same quarter of 2009. In terms of investment activity 2010 is seeing the highest transaction value when compared the last two years. If the current favourable economic conditions are sustained in the coming months, it is expected that the transaction volume at the end of this year will reach as much as €2bn, the figure recorded before 2008.”
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