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European commercial property recovery continues

Despite the deepening of the debt crisis and the fragile mood of the wider economy, European property investment markets saw trading volumes rise, the latest research from Cushman & Wakefield reveals, up 5% on the previous quarter and a 12.3% rise year to date.

Although momentum has slowed values are stable and the market is holding up well, especially when compared with other asset classes, according to Michael Rhydderch, head of the European Capital Markets Group at Cushman & Wakefield.

‘If anything, property has a growing level of appeal to many buyers in today's environment,’ he said, adding that risk, or rather risk avoidance, is a key factor and not just in deciding what markets and sectors investors will go to, but also how quickly they will act and how they will finance a deal.

‘Popular wisdom will tell you that we have seen a flight to quality focusing on core markets, but in reality it is not that black and white. Investors are clearly very discerning but many are looking for value, not just low risk,’ he explained.

The top markets for growth in activity in the past quarter include France and Switzerland but also the Czech Republic, Poland, Hungary and Slovakia as investors have started to act in Central Europe. At the same time, Russia has accelerated into fifth place within Europe, up from ninth place last year, with trading activity ahead of the Central European four combined.

It's not only to the East that risk is being accepted in exchange for the right assets. Italy saw dealing volumes increase by 35% on the quarter and while Portugal and Spain have seen a further fall in activity of 88% and 46% respectively, the PIIGS as a group saw trading rise 11.8%, in line with the 11.9% increase seen for the rest of the eurozone.

Foreign buyers were key in supporting the market over the third quarter, with international players increasing their market share to over 40%, its highest for two years. This compares to 34 to 35% in the first two quarters.

By sector, retail was viewed as more defensive than others but there was little change in patterns of activity over the quarter, with retail taking around 31% of activity, offices, 45% and industrial, 7%.

‘A lot of the deals completing recently started before the summer when investors were perhaps more risk tolerant than they are today and hence with finance still a limiting factor, particularly away from core markets, there is every prospect that activity will slow in the weeks to come,’ said David Hutchings, head of European Research at Cushman & Wakefield.

‘However, balancing that, we have a thirst amongst some investors to get deals done this year. This could yet produce a reasonable end to the year if deals can be closed out in time. We expect the market to get back into its stride quite quickly and are forecasting a final quarter volume of €33 billion, giving a total for the year of €119 billion, 2% up on 2010,’ he explained.

‘Into next year, no one can say exactly what may be happening of course and we will have to live with that uncertainty for a while. However, for property, the outlook is all about whether supply, which will be increasing as banks and businesses release stock, will match demand, which is likely to rise given the relativity of yields and bond rates in most of Europe, but only for the best space. Our prognosis is for a modest increase, to around €130 billion in 2012, but margins of error on such forecasts are higher than usual,’ concluded Hutchings.