Investment in European real estate soars to record levels

5 Jan, 2006, Europe

Investment in European real estate soared to record levels in 2005 according to a new report from Cushman & Wakefield Healey & Baker (C&W/H&B) - MarketBeat Europe 2005/6. The report highlights unprecedented yield compression during the year and predicts that given the level of demand and reducing perceptions of risk, yields will in fact fall further in 2006.

Whilst some investors are becoming concerned by the pricing of the market – particularly given the still hesitant nature of the occupational market recovery - trading volumes in 2005 are expected to exceed last year by some 14% with a total of Euro115 billion worth of assets expected to change hands by the year end.

Michael Rhydderch, Head of Cross-Border European Capital Markets, said: "The outlook for trading volumes in 2006 is positive and further yield compression is expected although it is unlikely to be sustained at the current pace particularly as bond and finance rates are expected to move up and equity markets are performing better. However, our view is that this will only take the froth out of the market and demand will remain ahead of supply for all sectors."

After total returns of around 15% in Western Europe this year for prime property, C&W/H&B expect returns in 2006 to average around 12%.

Whilst some investors are more cautious of the short-term potential in the retail sector, C&W/H&B sounds a note of optimism and expects a steady pick up in tenant demand next year in many parts of Europe. "Even the UK market, where the threat of a consumer-led slowdown has perhaps been of the greatest concern, recent trends are improved and the market may be bottoming out" said David Hutchings, Head of European Research, "and while secondary markets across Europe will remain weak given the competitive environment in retailing, we are looking for better growth from prime property in a number of areas, particularly in the shopping centre sector. Indeed, given ongoing shortages of modern retail supply, investor opportunities in development and repositioning and improving older stock must be expected to increase".

Investors, frustrated by stock shortages, are diversifying into alternative markets by geography and sector to find stock. As a result the market is now seeing a uniform high level of demand, with yield compression strongest in higher yielding markets such as Central & Eastern Europe and in sectors such as warehousing.

The flow of new funds and indirect vehicles is unlikely to slow with a growing presence of diversified open and closed ended funds. Whilst emerging markets such as Central Europe, Romania, Bulgaria and, increasingly, Russia and Turkey, are a focus for some, a growing number of funds are concentrating on lower-risk core locations which offer bigger markets and greater liquidity.

Key targets in the West remain France, Sweden and Spain but as well as competing with the rest of Europe to attract capital, investor demand is increasingly global, with growing interest in Asia.

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