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Outlook confident for European commercial property market, report shows

While demand is still heavily focussed on prime assets and core markets with 75% of interest in the top five, namely the UK, Germany, Sweden, France and the Netherlands, a number of new markets are coming into play most notably Poland, the Czech Republic, Norway and Turkey.
The report from Cushman & Wakefield says that investors clearly remain selective and alert to macro as well as local factors but despite the meltdown of Greece, risk appetites have improved and well balanced markets will at least be considered.
Despite this, with limited investment supply and finance not yet affordable in all areas, activity is not accelerating as fast as it might. Volumes in the opening quarter were 15% down on the final three months of 2009, although it should be noted that the opening months of the year tend to be quieter, with investors under less pressure to close deals and activity typically 10 to 15% less than in the usually busy final quarter.
Analysts believe that overall the market has in fact seen an all round improvement in the opening few months of 2010 but there are still issues barring a full recovery. ‘What we are seeing is an increasingly polarised and challenging market. Investment demand is rising and so is supply, but most of the new supply is not of the prime quality demanded by these buyers and pricing of non-prime assets is often still to high to compensate for the risk and the larger element of equity required,’ said Michael Rhydderch, head of EMEA Cross Border Capital Markets Group at Cushman & Wakefield.
The modest increase in availability of affordable debt is helping to reinforce a move towards larger lots however, as some investors look to escape the highly competitive market for small to medium sized lots and to get invested quickly ahead of the recovery.
This has been one factor behind the increased activity seen in the retail sector, with more larger lots and shopping centre portfolios being traded. Retail accounted for 43% of all trading in the first quarter, up from 30% last year and at its highest in at least 10 years. Germany overtook the UK to become the largest retail market over the quarter, followed, albeit at some distance, by Norway, Italy and the Netherlands, the report also shows.
Retail is likely to remain strongly in favour as a low risk, low volatility asset which can deliver good income growth through careful management, with many investors also expecting a more rapid return of rental growth.
On a geographic basis more marked differences are being seen and investors need to stay alert to a polarisation in performance within Europe. The UK, Turkey and Sweden saw modest rental growth while Bulgaria, Ireland, Slovakia, Romania and Greece saw notable further falls.
Looking ahead improving sentiment could be derailed if prices rise too far and if weaker sentiment on issues such as government indebtedness around Europe feeds concerns over the economic recovery, explained David Hutchings, Head of European Research at Cushman & Wakefield.
‘However recent economic data actually points to the recovery picking up in many areas and with interest rates set to remain low, we seem to be in a very supportive environment for property. We continue to expect a strong outturn for trading volumes this year, with activity increasing around 50% to €110 billion. Europe’s three largest markets, the UK, Germany and France, will see the bulk of this but other larger western markets will be buoyant, such as Italy and the Netherlands. The Nordics will see growing interest, led by Sweden and Norway, while Central Europe is being viewed in a new light by some and emerging markets are also likely to come back into favour, with Turkey at the forefront but Russia a strong bet for opportunistic players,’ he added.