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Commercial property market volumes did better than expected in 2011

Foreign investors were the main driver of this, increasing activity by 16.2% over the year versus a 3.6% rise for domestic buyers, and raising their market share to 35.8% from 33.2% in 2010, the latest market report from consultants Cushman & Wakefield shows.

Investors have continued to show a strong interest in core markets, with the UK, Germany and France by far the most in demand, taking 61.4% of all investment for the year.

The best growth in activity was in emerging markets. Seven of last year's top 10 growth markets were in Central and Eastern Europe: Bulgaria, Estonia, Slovakia, the Czech Republic, Hungary, Russia and Croatia, with only Switzerland, Denmark and France from the West appearing in the top 10.

Risk appetites did change markedly as the year went by the report reveals. CEE markets saw volumes rise 75% over the year while Western markets grew by just 2.8% but between the first and second halves of the year Western volumes rose 19.7% while CEE volumes were flat at 0.1% as buyers grew more cautious with the eurozone debt crisis picking up.

Despite this, central Europe in particular had a good year with volumes up 115.7% and a market share of 4.7%, its strongest on record, as investors adjusted their views on the real level of risk in these markets and also set about trying to find markets with stock and growth potential.

Volumes overall were flat in the Nordic region, with demand good but little supply at the price investors wanted to pay. Only Finland saw a decline in volumes however, with the other non eurozone Nordics all seeing some level of growth, notably Denmark.

All sectors have been in demand, with industrial markets gaining most as volumes rose 24.5% and its market share hit 9.4%. Offices saw volumes rise 11% and its market share reach 44% while retail saw just a 3% increase and its market share dropped modestly from 33% to 32%.

Demand for retail has been good nonetheless, with investors seeing it as a defensive asset, but supply of the right type of retail continues to run below demand and a lack of finance for large lots has also held activity back.

The UK has regained its crown as Europe's largest retail market, which Germany took for part of last year, while France was runner up to the UK as the region’s largest office market, taking over from Germany which fell back to number three.

‘It is clear that there is a lot of nervousness out there and sheer uncertainty may hold back dealing volumes this year. At the same time however the volatility we are seeing in other asset classes as well as the relative level of property yields is serving to stoke up demand for the best assets in defensive markets,’ said Michael Rhydderch, head of the European Capital Markets Group at Cushman & Wakefield.

'With some new equity coming into the market and some on the sidelines likely to get more motivated, we're anticipating turnover holding firm for the year at something like €123 to 128 billion, despite the issues in the debt markets,’ he added.

With bank deleveraging to pick up, getting hold of affordable debt will be an issue for all except the top tier of borrowers with the best asset backing but current conditions will also lead to more opportunities according to Rhydderch. ‘The volume of loan maturities is set to rise this year and a lot can’t or won’t be refinanced. This will inevitably result in more stock coming onto the market,’ he explained.

‘On the demand side, large pension and sovereign funds from around the world will remain hungry for prime assets in core markets, with North American and Far Eastern funds again dominant. Private equity will also be a key player this year at typically higher risk levels, while private individuals from Europe, Asia and the Middle East are likely to be strong across a range of risk levels. However, all players will need to look closely at which markets and sectors they are targeting; we expect there to be an adjustment to pricing and/or risk tolerance by many in order to meet their buying objectives,’ he added.

He believes that distressed markets may offer the best high return opportunities in 2012 but strong interest in core markets will continue and the best should deliver stable and possibly improved values. ‘Indeed yields still look relatively attractive and could fall. Good prospects meanwhile will be seen in areas such as the Nordics where economic growth is above average and market risks low, or in parts of CEE where economic growth is expected to hold up, notably Poland and Russia and possibly Turkey,’ concluded Rhydderch.

According to David Hutchings, head of European Research at Cushman & Wakefield, the hallmark of the year is likely to be whether or not the economy and the property market can recover its confidence. ‘The eurozone crisis is clearly not going away any time soon and alongside this we have more austerity, a squeeze on liquidity and the start, hopefully, of more serious reforms,’ he said.

But he explained that as a full scale breakup of the eurozone in 2012 still looks unlikely. ‘In fact the jigsaw pieces of a solution may soon start to come together and if so, this could be the key to greater confidence and helping Europe to get its mojo back. However, in truth no one yet knows how the sovereign debt crisis will play out and what's more, if 2011 taught us anything it is that some of the biggest challenges of the year may not even be known about yet,’ he said.

‘As a result, as investors build up their portfolios, the more successful will recognise that risk management requires diversification not just core holdings in a small number of low risk markets. A rising ride of investment could therefore steadily spread to new markets later in 2012, albeit not reaching as far as secondary shores for some little while yet,’ he concluded.