RICS: Europe's commercial property market reflects divided recovery (EU)
Friday 29 July 2011
|Most commercial property markets around the world remain robust, in spite of the recent economic difficulties. In Europe, Germany and France have reported strong performances with Russia, Poland and the Czech Republic also showing encouraging commercial sector results, says the latest RICS Global Commercial Property Survey, published yesterday (July 28, 2011).|
Russia’s commercial property market is performing extremely well.
The report indicates that the majority of countries surveyed witnessed positive growth in occupier and investment demand as well as in development starts during the second quarter of 2011. Predictably, the results show that the mood in the countries on the outer fringes of the euro area has deteriorated further in the past three months, as concerns over a Greek default intensify. The survey also reveals that expectations for rental values and capital values remain negative in half of the European countries.
Globally, China and Hong Kong continue to be the star performers in both occupier and investment demand. More significantly, they have been joined near the top of global rankings by Russia, Poland and the Czech Republic.
Russia’s commercial property market is performing extremely well, with respondents reporting a sharp rise in development starts during the second quarter and continuously growing investment demand that has now been rising for seven consecutive quarters. RICS members also reported increasing levels of occupier and investment demand in Poland, where rental expectations continue to grow reflecting market confidence.
The commercial property market in Germany continues to shine although expectations for the rate of growth in the coming quarter have moderated slightly. Occupier demand remained positive during the second quarter of 2011, as did development starts. Investment demand also maintained its positive trend, but a little less so as the net balance score fell from +60 to +36.
Despite this positive sentiment, poor economic conditions continue to weigh down on the commercial real estate market in several European countries. In contrast to France, Germany and Russia, Greece, the Republic of Ireland, Portugal and Spain to a certain extent, sit at, or just above, the bottom of the rankings for most of the key indicators.
Commenting on the survey, Simon Rubinsohn, RICS Chief Economist, said: "The recent move by the European Central Bank to raise interest rates will likely further widen the already large gap between the performance of commercial property markets in core and peripheral Europe.
“While countries in the former group continue to report generally positive numbers – Germany being a particularly bright spot – the latter group is struggling with the ongoing sovereign debt crisis and weak economic growth. Indeed, countries such as Greece, Portugal, and the Republic of Ireland all have to deal with heavily troubled commercial real estate markets.
“Over the course of the year, we see little reason for the gap between these two blocs to narrow."
Other key findings:
According to the survey, Russia saw a sharp rise in development starts in Q2 2011 (from +11 to +44), which reflects strong occupier demand combined with a lack of good quality space. This imbalance, in turn, has led to a particularly positive outlook for rental expectations for Q3 2011 as the economy heads towards 5% growth this year. Meanwhile, capital value expectations remain very firm.
The commercial real estate market in France was a little steadier in Q2 after the recent impressive performance with capital value expectations just edging into negative territory (-6) for the first time since Q4 2009. After a strong Q1 2011, development starts contracted with agents reporting a net balance score of -5.
In addition, sentiment towards the amount of space available for occupation jumped considerably from +5 to +20. That said, the outlook for rents and investment demand remains reasonably positive for Q3 2011.
For Q3 2011, agents remain generally optimistic but the gains in rental and capital values are both thought likely to moderate a little more – the readings have dipped from +52 to +36 and +32 to +26, respectively. Relatively strong growth suggests that this country is best placed to withstand the emerging trend of increasing interest rates in the euro area.
The UK commercial property market remained fairly flat in Q2 2011, reflecting the country’s picture of mixed economic growth. Occupier demand remains positive as does available space but both posted relatively modest increases.
Investment demand was also broadly flat. Agents expect further declines in both rents and capital value for Q3 2011, albeit at slowing rates. In spite of the gloomy national picture, however, London’s commercial property market remains robust.
Other regional highlights
A turnaround in US optimism
Despite the optimism expressed by agents in the first quarter of the year, the latest survey seems to suggest that the commercial property market recovery in the US may already be encountering significant headwinds. While still positive, the rate of growth in investment demand fell in Q2 2011 and development starts continue to slide albeit a little less so than in the previous quarter.
Of most significance however, rental expectations, which had turned positive in Q1 2011, have once again drifted back into negative territory, with agents reporting a net balance score of -11. That said, capital value expectations are still positive. If the disappointing trend in employment data, most visible in the recent payrolls numbers, is sustained, the renewed softening in the occupier market could become more entrenched and at some point this could seep into sentiment on the investment side of the market.
China’s economy slows, but commercial real estate remains robust
Q2 2011 economic data suggests that China’s economy is beginning to slow. This moderation has not yet flowed through to the country’s commercial property market however, which continues to post very high figures across the board.
Both occupier and investment demand remained strongly positive this quarter (+63 and +42, respectively) and despite continued interest rate hikes and other restrictive measures, agents remain optimistic about the near-term prospects for real estate; rental expectations came through at +73 and capital value expectations posted a net balance of + 71.
While forward-looking indicators remain positive for now, should the economic slowdown continue it could at some point begin to filter through to the commercial property sector.
Despite recent actions taken by the Banco Central do Brasil to control rising inflation, agents report that the mood in the commercial property market remains upbeat in this country. The rate of growth in tenant demand picked up considerably in Q2 2011, with net balance scores moving from +38 to +79.
Meanwhile, available space actually fell back this quarter (-33). Not surprisingly, agents also report a strong development pipeline; development starts posted a highly positive net balance score of +61, up from +13 in Q1 2011. Looking ahead, agents remain optimistic regarding rental and capital value expectations for Q3 2011, continuing a trend that began in late 2009.
The adoption of a more restrictive monetary policy does appear to be having an impact on property in India. While still positive, occupier demand fell from a net balance score of +39 in Q1 2011 to +8. Development starts saw an even more dramatic fall in the rate of growth, moving from +31 to +2 and investment demand moved into negative territory for the first time since Q3 2009.
In addition, both rental and capital value expectations experienced a slowdown, from +39 to +18 and +40 to +27, quarter over quarter. Although this more subdued real estate picture is set to persist near term, the generally firm economy should prevent any outright decline in either rents or prices.
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