Analysts report warns of Euro debt & currency effects on European commercial real estate markets

The spread between European property yields and the risk-free rate, or the yield on government bonds, is well above its long-term average, which historically has been a strong signal for investors to move into bricks and mortar, says the latest European report from Investment Management Europe.
 
But it warns that storm clouds in the form of a possible failure of the Euro zone’s recent €750 billion safety net to secure the fiscal positions of countries on its southern and western peripheries, along with currency market threats to the euro, could undermine Europe’s fragile economy recovery.
 
And the prospect of a large volume of maturing debt in the next three years triggering distressed sales of properties by banks will mainly be a challenge for secondary markets.
   
‘The coming quarters will show whether the rescue package is sufficient to have a lasting effect on confidence and if the countries under scrutiny will initiate the required fiscal discipline and reforms. If not, real estate markets in Europe might face renewed headwinds,’ said Eugene Philips, Managing Director Research & Investment Strategies at ING REIM Europe.
 
But he added that the picture for major European real estate investment markets continues to look attractive, as alongside the positive yield spread of property over government bonds, ING economists are forecasting positive growth in most European countries again.
 
‘Modest economic recovery will support property occupier demand from 2011 onwards, which should underpin the momentum of the upturn that has been led, so far, by the real estate investment markets,’ he added.
 
The report indicates that the European retail and logistics property sectors look more appealing than most office markets over the 2010 to 2011 timeframe due to their proven defensive qualities, notably the high and stable income component in investment returns, during the economic crisis.
 
After a synchronized downturn European office markets have entered a phase of increasing disparities, which offers opportunities in selected parts of the market, the report says. Despite early signs of rent recovery in London and Paris, further rent declines are expected for most other major markets during 2010. Recovery will become more widespread in 2011.
 
After a relatively strong rebound in 2010, yield compression in Western Europe is expected to slow down in 2011 and to remain limited in 2012. Central and Eastern European office markets are forecast to benefit from an inflow of foreign capital in search of attractive yields, when Western European yield declines slow.
 
The report lists Prague, Paris La Defence and Brussels at the top three prime European office markets. Sweden, France and Finland head the list of prime shopping centre markets and Paris, Hamburg and Rotterdam are the top three prime logistics markets