European commercial real estate markets seeing strong momentum
European commercial real estate markets are generally continuing to display strong momentum, particularly on the investment side, according to a new report.
However, feedback remains cautious across much of Asia and the Middle East reflecting challenging macro conditions, says the latest global commercial property analysis from the Royal Institution of Chartered Surveyors (RICS).
Investment enquiries remained robust across all sectors while the supply of property for investment purposes fell at the fastest pace since the series was introduced in 201 with Germany top for investment sentiment in the third quarter of 2016 and New Zealand, France, the Czech Republic and Austria all recording strong readings.
The report says, that given these dynamics, capital values are expected to be squeezed significantly higher over the year ahead.
The strongest gains anticipated are across the office sector and European markets posted 11 of the top 12 index readings. On the occupier side, respondents in Hungary continue to report the strongest momentum on a global comparison.
Tenant demand remains firmly on the up in the office, industrial and retail sectors, while availability continues to decline across the board. The supply demand mismatch is anticipated to drive rents higher over the coming 12 months, with growth across prime assets expected to outstrip secondary.
Elsewhere, occupier market fundamentals appear firm in New Zealand, Spain, Ireland, Portugal and Germany with activity in the occupier market improving at a healthy pace. Consequently, contributors across these nations are confident in seeing strong rental growth during the year ahead.
Questions about Brexit where included in the survey for the first time to see if there is evidence of firms looking to relocate away from the UK in response to the decision to leave the European Union.
The results show over 30% of respondents in Poland, Germany and Ireland have already received enquiries from companies looking to relocate part of their business away from Britain. A smaller, but not insignificant, share of contributors in Spain, the Netherlands and France also reported having seen such enquiries since the vote in June.
Going forward, around three quarters of respondents across these nations expect there to be an increase in firms moving away from Britain and into Europe over the next two years.
In recent quarters, real estate markets in Japan and the United States appear to have lost a little steam. Indeed, investment enquiries stagnated in Japan for the second successive report. For now, a shortage of supply is expected to support further gains in capital values. However, respondents anticipate growth is likely to almost grind to a halt over the next three years.
In the US, despite demand regaining some impetus on both the investment and leasing sides of that market during the third quarter, rental and capital value projections remain only modest. The report suggests that this is likely linked to heightened perceptions that valuations are now stretched relative to fundamentals.
Nearly two thirds of respondents sense commercial real estate to be overpriced to some extent at present. What’s more, nearly 40% feel the market has peaked in the current cycle while almost 30% sense it has already started to turn down.
Feedback across China remains downbeat with weak demand being met by rising supply, producing a flat outlook for both rents and capital values over the year ahead. That said, there is a stark divide between prime and secondary markets with the former expected to post reasonably solid growth while the latter comes under downward pressure.
Broadly speaking, these trends are very similar to those reported across much of Asia, the report says. Indeed, demand from both investors and occupiers failed to increase in Hong Kong, Singapore and Malaysia during the third quarter and as a result 12 month rental and capital value expectations remain relatively pessimistic. In Hong Kong however, investor demand did increase sharply across the office sector, helped by a strong pick-up in foreign enquiries, and this is expected to lift office values.
Conditions remain challenging across the United Arab Emirates and Qatar, with low oil prices a key factor. During the third quarter demand remained in decline, supply rose significantly, and over 50% of respondents felt the market was in the middle stages of a downturn.
In Brazil and Russia, which have both seen sentiment deteriorate markedly over the past three years, the results are pointing to a relatively more stable picture emerging. Rents are now expected to hold steady in Russia over the next year although respondents do still anticipate some further downside in Brazil.
However, demand from investors increased in Brazil during the third, ending a run of continuous decline going back to 2013. This was enough to lift 12 month capital value expectations out of negative territory for the first time in over three years. Furthermore, a majority of contributors in both Russia and Brazil feel the market has reached the bottom while some agents are seeing the early stages of an upturn.