CBRE expects further polarization in European real estate investment markets (EU)
Friday 7 October 2011
Sovereign debt problems and divergent national economic performance will lead to increased polarization in European commercial real estate investment markets in Europe, CBRE revealed at its European Investment Market briefing at the annual Expo Real conference.
The polarization of prime and secondary commercial property markets, which has characterized the European real estate landscape over the last two years with investment interest highly concentrated at the prime end, is expected to continue for the foreseeable future and possibly intensify.
Very low returns on cash and top-rated government bonds make prime property yields relatively attractive, but with major economic uncertainties prevailing, property investors will focus on larger, more liquid markets and those perceived to have stronger economic fundamentals. CBRE anticipates that sustained competition for core assets will support robust pricing for prime quality property.
Speaking at Expo Real, Dr. Peter Damesick, EMEA Chief Economist for CBRE, said: “Current drivers among both equity-based and debt-financed investors are leading to a concentration on prime quality assets in core markets. This is becoming a crowded space where investors are finding it difficult to secure sufficient opportunities of the quality required. Meanwhile, in much of the rest of the market liquidity is limited and pricing much more uncertain. Heightened uncertainties created by the sovereign debt crisis and downgrades in growth expectations are reinforcing these trends.”
Outside the prime category, CBRE expects widening disparities in property pricing and performance depending on asset quality and local market conditions. Good secondary property in stronger markets with potential for asset management to add value will attract investor interest. Poorer quality secondary or tertiary property has a more challenging outlook with an ongoing lack of debt finance for investment. Pricing is untested in substantial parts of the secondary market in Europe and it is likely a significant proportion of low quality assets will only find purchasers at prices offering potential for high risk equity-style returns.
At a sector level, retail property has taken a larger share of the European investment market in 2011, with the volume of purchases in H1 2011 up by 29% on a year earlier. Retail property investment was significantly stronger compared to 2010 activity in Germany, the Nordic countries and CEE.
CBRE’s analysis shows that real estate investment volumes in Italy and Spain were down by over 40% in the first half (H1) of 2011 compared to H2 2010. In Portugal, transactions declined by 80%. The much larger markets in the United Kingdom (UK) and France also saw reduced activity in the first half (H1) of 2011 compared with H2 2010, while Germany saw a 6% increase and Central and Eastern European (CEE) markets in aggregate recorded a 49% rise in investment volume.
Damesick added: “Total transaction activity in European real estate has slowed during 2011, especially in the southern European markets where sovereign debt problems are greatest. There has been a shift in capital flows in favor of Germany, Sweden and parts of CEE markets where investors perceive stronger economic fundaments. At the same time the polarization between prime and lesser quality secondary assets is being reinforced across European markets.”