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European commercial property loses ground on rest of the world

Rental predictions were in negative territory across much of Europe with the noticeable exception of Germany in the fourth quarter of 2011, according to the latest Global Commercial Property Survey from the Royal Institution of Chartered Surveyors.

 The prospect of an extended period of minimal growth, if not a retreat back into outright recession, is clearly weighing heavily on the sector in the wake of the ongoing turmoil relating to the sovereign debt crisis, it points out.

However, rental expectations remain positive in eight of the countries surveyed, with respondents in China, Brazil, Russia and Canada amongst those predicting rises rather than falls in future rental values. In each of these markets fresh demand for space continues to outstrip new supply which reflects the relative resilience being displayed by these economies.

On the investment side, it is the same four countries, China, Brazil, Russia and Canada, where expectations for capital values are strongest. Meanwhile, across much of Europe sentiment is particularly downbeat.
The report also points out that the revival in transaction activity in the US is expected to persist, despite on going concerns about the outlook for the economy. Indeed, surveyors in the United States reported the strongest reading regarding the outlook for future sales.
‘It is no surprise that the fourth quarter results are a little bit gloomier, given the economic news during the period. However, real estate in some parts of the world continues to provide significant opportunities. In particular, sentiment remains generally upbeat in many of the faster growing economies even if they are likely to grow a little more slowly in the coming year,’ said Simon Rubinsohn, RICS chief economist.

‘Moreover, the survey also highlights the difference in the developed world between those countries that largely shunned the sub-prime credit boom such as Canada and Germany and those that participated in it,’ he added.

The commercial property market has fundamentally changed for at least the short to medium term according to Kames Capital’s head of property investment Phil Clark.

Clark, who is also currently the chair of the Investment Property Forum, believes the economic uncertainty in the eurozone and a plethora of new or forthcoming regulation have caused a fundamental shift in the short to medium term.

This uncertainty has led to many investors lacking the confidence to invest in anything but the best commercial premises in London and the South East, to the detriment of the rest of the UK market. However, he believes there are still plenty of good opportunities offering good potential returns.

Clark suggests that over the past year investors could be forgiven for struggling to be certain about where to invest in UK property. But he thinks that, given the severity of falls in UK commercial property values in 2008/09, they should not lose sight of the positive 8.1% 12 month return from UK commercial property market or that the volume of commercial property transactions in 2011 were in line with the historic annual average of around £30 billion.

‘Last year the UK commercial property market started with some signs of renewed optimism but in truth by the mid-year the only question on our minds was whether the Euro would survive, and if not, what impact would that have on the UK, commercial property values and our industry. It is still not clear what the future of the Euro will be although it seems increasingly likely to involve some members leaving the eurozone,’ said Clark.

‘However, the problems arising out of the exuberance of the last economic cycle are now giving rise to the opportunities in the next, as banks continue to deleverage their exposure to UK commercial property and more experienced investors look to buy commercial property investments outside of London and the South East,’ he explained.

‘Furthermore, some institutional investors are starting to see the compelling opportunity to take the place of banks in lending to good quality properties and experienced property investors. There are also substantial opportunities to secure attractive income returns, often let on index linked long leases, from alternative property sectors such as sale and leasebacks. Ground rents, healthcare, ground rents, student accommodation to name a few,’ he added.