Real estate back in favour
Raymond Jacobs, managing director, Franklin Real Asset Advisors provides the European property markets quarterly review.
- The European economic recovery continued into the second quarter of 2014 and the outlook remains fairly stable
- Within an on-going low interest rate environment in which investors remain keen to find yield, real estate is now clearly back in favour as evidenced by the level of investment activity during the second quarter 2014.
- Despite a strong investor market and the general economic improvement across Europe, tenant take-up, on the other hand, remains relatively subdued as occupiers are still exercising caution in a number of key markets.
- The retail outlook reflects the general economic divergence across Europe, with the Northern European countries benefitting from employment growth while in Southern Europe, high unemployment and a weak housing market will likely prevent the consumer recovery from taking off in the short term, in our view.
The European economic recovery continued into the second quarter of 2014 and the outlook remains fairly stable. Growth is progressing at various speeds and degrees of strength across the region and, for Europe as a whole, this adds up to a moderate recovery. The ability to withstand economic turbulence in the emerging markets and a geo-political crisis in Eastern Ukraine demonstrates a fairly robust growth trend. The latest European Commission forecast indicates growth in the European Union (EU) to average 1.6% in 2014 and growing to 2.0% for 2015. The UK continues to outperform the EU average with predicted growth of 2.7% in 2014, slowing to 2.5% in 2015.
Within an on-going low interest rate environment in which investors remain keen to find yield, real estate is now clearly back in favour as evidenced by the level of investment activity during the second quarter 2014. According to CBRE, the total amount of real estate transactions in the second quarter increased by 30% over the second quarter of 2013 to €44.6bn. This transaction volume marked the second best quarter since 2007, indicating a return to pre-crisis volumes. Despite the perception of weakness in the French real estate market due to its lagging economy, transactional volumes in France were strong over the quarter, surprising many observers. With 60% of all real estate transactions in the UK now happening outside London, the trend of investing in secondary locations in the UK continues.
The yield contraction witnessed earlier in stronger European secondary markets has now also spread to locations hardest hit by the global financial crisis with Madrid, Barcelona and Lisbon all seeing yields move in by 50 basis points or more. Despite speculation about future interest rate rises, prime yields in London have remained at 4.5% for prime office in the City of London. In Paris, prime yields for office remained unchanged at 4.25% as did prime yields for retail, at 3.9%. In Germany, prime yields remained stable at 4.6% as an average for the top five cities, whilst retail saw a continued contraction to 4.1% for the most prime shops in Germany.
Despite a strong investor market and the general economic improvement across Europe, tenant take-up, on the other hand, remains relatively subdued as occupiers are still exercising caution in a number of key markets. Overall demand is still below-trend but some markets are showing an improvement. Take- up in London during the first half of 2014 was up 12% over the same period last year and the vacancy rate in the city remained stable at 7.8% with prime rents around the £60 per square foot per annum mark. In Paris, despite more leasing activity in the market, vacancy has been creeping up to 7.4% and prime rents are now set between €750-800 per annum, per square meter. There were no changes in Frankfurt where prime office rents are at €38 per square meter per annum and vacancy remained stable at 12%.
The retail outlook reflects the general economic divergence across Europe, with the Northern European countries benefitting from employment growth and a recovery of the housing market, which suggests that private consumption should stage a gradual recovery in 2014 and 2015. In Southern Europe, despite all the recent positive economic news, high unemployment and a weak housing market will likely prevent the consumer recovery from taking off in the short-term.
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