UK, Norway and Poland most likely to see early recovery in Europe
10 Jun, 2009, Europe
Cushman & Wakefield today issued its bi-monthly Economic Pulse reports analysing business and commercial real estate interests and conditions in Asia, Europe and the Americas. The reports provide detailed observations and commentary on stabilization trends that are beginning to emerge in various economies and include balanced views on the likelihood for recovery in each region. A brief summary of each report outlined below.
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Forward looking indicators are up across Europe amid a growing belief that the region is now passed the worst of the recession. The evidence for stabilization, let alone recovery, is however at best mixed and still very thin in some countries in the region. Western Europe, particularly the UK has seen more positive indicators than eastern markets, with manufacturing tending to show more improvement than other sectors of the economy. However, there has also been some respite in retail sales, housing and even employment markets in certain countries, along with a modest shift in credit availability and a marked improvement in stock markets, suggesting greater faith in the future course of profits as well as increased tolerance for risk.
According to the report, risks to the recovery will remain and polarization in the economic performance between European markets will accelerate in 2010, with the UK, Norway and Poland perhaps set to see early recovery, followed by Denmark, Finland, the Czech Republic and possibly Sweden.
In the real estate sector, yields are showing early signs of stabilisation in some areas as investor interest firms. Rental falls are taking over from yield increases as the key source of pricing risk however and tenants remain in the driving seat, with those seeking new space or renegotiating at lease-end commanding a strong negotiating position. Nevertheless, with economic forecasts stabilising and rents adjusting rapidly in some areas, we may soon be halfway through the likely rental adjustment process. As a result, the window of opportunity for tenants to enjoy their dominant position may not be as long as many expect, particularly for prime space where a significant fall in development will add to the potential for space shortages to emerge in 2011.
Current economic indications in the Americas point to improvement sometime in late 2009. For commercial real estate markets, which tend to lag economic performance, this means a recovery is more likely in 2010.
In the near term the U.S. economy will continue to shrink, and unemployment figures will continue to rise. However, the recent moderation of job loss indicates that the speed of the collapse is showing the first signs of slowing. In addition, consumer confidence is on the rise and there are some positive signs in the U.S. housing market, including lower inventories of unsold homes. This modest shift from almost everything declining to some indicators increasing has prompted recent cautious optimism, but green shoots are still very preliminary in nature and further improvement over the next quarter will be an important sign that a bottom is near.
In South America, weakness in exports to the U.S. has been offset by healthy domestic demand leading to more moderate declines. With sound economies and investment environments, Brazil, Peru and Colombia are the most attractive economies. Affordable housing initiatives targeting low-income segments and infrastructure investments are the most promising growth sectors in the three countries.
In Canada, the financial system did not get as over-leveraged as in the US, putting the banks in much better condition to weather the storm. The Canadian government has pledged $12 billion (Canadian) in new infrastructure funding which is expected to create and maintain up to 190,000 jobs by the end of 2010. Rising energy prices and a nine percent increase in Canada’s international energy exports are also expected to have positive effects. Growth in the Canadian banking sector is anticipated as we enter 2010, and very conservative occupancy decisions in Central and Eastern Canada will mean less space returning to market.
Economic and real estate conditions in Mexico are similar to those in Canada. Higher oil prices are helping the Mexican economy offset some of the weakness in exports to the US. Like Canada, the Mexican banking system did not become as highly leveraged as in the US, so the economic impact has not been as severe. In the real estate investment sector, values are down about 10% with cap rates up. Similar to the rest of the Americas, the number of transactions has been small, making it difficult to ascertain prices.
Asia has widely differing GDP forecasts for 2009 with Japan at -6.25% and China 6.5%. Termed newly industrialized economies by the IMF, the smaller export trading nations South Korea, Taiwan, Hong Kong and Singapore have been hit hard. The trough of their rate of GDP contraction is worse than the major G7 advanced economies, but speed of the bounce back is expected to exceed the slower recovery of the G7. China, India and Indonesia, with large populations and self generated domestic demand, are fairing reasonably well and are continuing to grow throughout 2009 as others contract.
On the real estate front, brokers are experiencing an uptick in demand for investment in certain markets throughout Asia. Yields have moved out in line with a general re-pricing and if the Asian stock markets have indeed bottomed, Asian real estate deals should now pick up across the rest of the year.
Tenant demand is likely to remain on the weak side for the rest of this year as multinational corporations use this time to restack and implement real estate strategies in Asia that have long been best practice elsewhere. Tenant demand is expected to re-start in the first quarter of 2010. Rents will continue to fall this year, based on weak demand with the bottom for rents depending on supply in each market.
Large Asian economies have continued to grow through one of the worst global recession; nonetheless office markets will take time to absorb the supply coming on stream given the weaker rate of tenant demand. Tenants will have opportunities to up grade space and implement longer term lower cost bases in countries poised to continue to grow in 2010.