MarketView European Capital Markets

Transcription

1 MarketView European Capital Markets OVERVIEW Quick Stats Change from Q4 11 Q1 11 Capital Values Yields Hot Topics Investment activity down on weaker economic activity. Economic outlook remaining weak for the near term. Investors continue to follow risk averse strategies favouring stronger economies, non-euro economies and prime property. Capital values essentially stable for prime, but falling for non-prime. European investment vo olumes lower than expected in Q1 The fall back in investment activity in Europe in Q1, to 23.8 billion, reflects an 18% drop on the same period last year. Although disappointing, this was not entirely unexpected given the downgrades that have been made to economic growth forecasts since the middle of last year. The pipeline of large transactions that are in hand, but not yet completed, suggests that the figures will recover somewhat in Q2. Nordics benefit from ris sk-averse strategies The country breakdown of investment activity was broadly as expected, driven by economic sentiment with the UK, Germany and the Nordics all benefitting from investor s risk aversion. The Nordics experienced over 5 billion of activity during the first three months of the year, which is the highest level of quarterly turnover since Q Local and foreign investor interest continues to grow in response to the region s economic independence from the Euro and relatively strong domestic economies. Further tightening of de ebt availability Despite the ECB s injection of 1 trillion of liquidity into Europe s banks, their terms for real estate lending continue to tighten. The introduction of new, non-bank, lenders is making a difference, but only for specific types of product and not across the market as a whole. This will further polarize the performance of prime and secondary property in the short to medium term. Political uncertainty will impact on activity Recent political developments such François Hollande s victory in the French Presidential election and the result of the Greek general election will increase the uncertainty regarding European economic policy in the short term. This in turn will impact of levels of real estate investment activity as decision processes are extended, but at the same time favours prime real estate s safe-haven status. Total Commercial Real Estate Investment Turnover in Europe ( billion) Quarterly total (LHS) Rolling 4-quarter total (RHS) , Ltd

2 MarketView European Capital Markets ECONOMIC OVERVIEW The economic picture across virtually the whole of Europe has weakened considerably since the middle of last year. Recovery had been fairly widespread, albeit of significant difference in strength from country to country, although despite that recovery the overall level of GDP was typically still below the level seen in Q in most countries, as shown in the chart opposite. The eurozone is now expected to contract over the course of 2012 before returning to relatively slow (subtrend) growth in Growth has slowed even in those countries (such as Poland, Sweden and Germany) that had been experiencing strong growth in The dominant economic driver in Europe is the sovereign debt crisis, which is stubbornly refusing to dissipate. Strict austerity measures have been imposed as a condition of bailout agreements, primarily driven by Germany and France, but most recently we have seen a political reaction to this strategy such as the recent election results in France and Greece. Significantly François Hollande, the newly elected French president, has positioned himself as against the strategy of unrelenting austerity. Already the results of these two elections have triggered a wave of falls on European stock markets and sharp movements in government bond yields. Although these election results are significant, probably of more importance to a resolution of the euro sovereign debt crisis is the changing economic fortunes of the southern European countries, Spain, Italy and Portugal. All are now expected to see substantial falls in GDP over this year and next, which makes the process of dealing with their government debt that much harder. Pressure is building for a more flexible approach to deficit reduction as yet further cuts in government spending in these countries will (at least in the short term) accelerate the fall in economic output. A small number of European countries continue to outperform. Although growth has slowed compared to 2011, Poland, Germany and most of the Nordic countries are still experiencing growth well ahead of that in the rest of Europe and the conditions exist for this to remain the case. Germany, having reset its competitiveness during the mid 2000s is now further benefitting from the falling euro to drive growth in exports. For the Nordic countries, their healthy government finances mean that they are not having to pursue the same austerity measures that are having a negative effect on current growth rates elsewhere. Real GDP Indexed to Q Index Q = Source: Oxford Economics Poland Sweden Germany France United Kingdom Italy Real GDP Growth, by Country, 2012 & Poland Sweden Romania Finland Germany Denmark Source: Oxford Economics Changing Economic Sentiment Changes in Forecast 2012 GDP Growth Over Time 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Jan-11 Feb-11 UK Austria France Ireland Belgium Czech Rep Eurozone Hungary Netherlands Spain France Germany Euro zone US UK Spain Mar-11 Apr-11 Ma-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Italy Jan Portugal Feb Greece Page , Ltd Source: Consensus Economics

3 European Investment by Sector (%), Office Industrial European Investment by Sector (%) Office Industrial Retail 60% 50% 40% 30% 20% 10% Retail Other INVESTMENT MARKET Direct European commercial real estate investment fell this quarter to 23.8 billion. This is 31% below turnover in Q reflecting a seasonal slowdown after the rush to complete deals before year end. More notably the market in Q1 was also 18% below the same period a year ago - a time when the economy appeared poised for recovery. The office sector was dominant in Q1, accounting for more than half of the European market. This reverses the trend over much of the last three years which had seen retail property growing as a proportion of the European market. Following high levels of retail investment during 2010 and early 2011, retail activity fell back to just 19% of the market in,which is the lowest recorded share since the start of The drivers for this shift in activity are probably coming from both sides. Prime retail property remains in strong demand from investors which is confirmed by numerous surveys of investor preferences as well as feedback from our clients. However, after the high levels of activity in recent years the supply of good new investment opportunities was very limited at the start of this year. At the same time, there has been an increasing amount of good quality office property coming to the market. This has met with strong demand from investors who see the lack of development activity over recent years as a potential source of rental growth in future years or at the very least a factor that will maintain occupancy rates and rental income for good quality space. MarketView European Capital Markets 0% Overall the country breakdown of investment activity was broadly as expected, driven by economic sentiment. The UK, Germany and the Nordics all benefitted from investors risk aversion. European Investment by Market UK Germany Norway Sweden The Nordics experienced over 5 billion of activity during the first three months of the year, which is the highest level of quarterly turnover since Q Local investors are increasingly active and foreign investor interest continues to grow in response to the region s economic independence from the Euro and relatively strong domestic economies. For similar reasons the UK market continues to appeal to both local and foreign investors. Germany continued to experience strong investor demand this quarter with over 5 billion transacting again driven by its relative economic strength. France Benelux CEE Southern Europe Other The CEE market seemed to buck the trend of investment activity matching economic activity. Despite comparatively strong economic fundamentals the region as a whole was far less active with just under 1 billion transacted in. This reflects a number of factors; the lack of large deals, the shortage of prime stock and the tightening of bank lending for all but the best assets. CEE activity was dominated by Poland the one market where activity remained broadly in line with historic levels of activity. Page Ltd

4 European Indicative Prime Yields, MarketView European Capital Markets Country Market Prime Office Change on Qtr Prime Retail Change on Qtr Prime Industrial Change on Qtr Austria Vienna Belgium Brussels Bulgaria Sofia Croatia Zagreb Czech Rep Prague Denmark Copenhagen Finland Helsinki France Paris Germany Berlin Germany Frankfurt Germany Munich Hungary Budapest Ireland Dublin Italy Milan Italy Rome Netherlands Amsterdam Netherlands Rotterdam Poland Warsaw Portugal Lisbon Romania Bucharest Russia Moscow Serbia Belgrade Slovak Rep Bratislava Spain Barcelona Spain Madrid Sweden Stockholm Switzerland Zurich Ukraine Kyiv UK London UK London (City) UK Edinburgh Page , Ltd

5 YIELDS EU-27 Average Prime Yields (%) High Street Retail Industrial Offices The EU-27 prime yield index has remained relatively unchanged for almost a year now. The combined index has hovered around 5.75% for the past year and the current figure of 5.72% represents the second increase in the index from the low of 5.69% in September Yields in the office and industrial sector are increasing, but this was balanced by falls in the high street retail index, which this quarter dropped 5 bps to 5.19%. The majority of markets were stable during the quarter across all sectors. Yields have started to increase in the office and industrial sector in Western Europe including in France, the Netherlands, Spain and Italy. Yields remained stable, or fell, for prime high street retail which continues to be viewed as a defensive asset where values are buoyed by an essentially fixed total stock. MarketView European Capital Markets Key Lending Terms*: Top Quality Real Estate and Tenant, March 2012 Market Max Loan** Max LTV Margin*** France 50 mil 60% 175 bps Germany 150 mil 67% 170 bps Netherlands 80 mil 70% 150 bps Spain 30 mil 60% 350 bps UK 60 mil 65% 250 bps Market Trend / / * New 5-year loan based on the maximum underwriting ability of a single lender ** Max ticket size from a single lender *** Margin over euribor/libor swap DEBT MARKET The first quarter of the year saw further tightening in lending terms, with increases in margins across most markets on top of notable hikes in the previous six months or so. However, in such a thin market the exact terms on offer become more difficult to determine. With Moody s rating agency expected to start cutting the credit ratings of over 100 banks, in some cases severely, their funding costs will rise further, leading to an even more restrictive lending environment than has been the case in recent past. Political uncertainty serves as a further deterrent to recovery of the debt market, and while newly elected presidents and parliaments bring hope to finding solution in the longer-term, such changes bring more uncertainty and volatility in sentiment in the short-term. In Spain, for example, following a change in government, there are now some regulatory changes in train, including for the banking system. Still under review, these are expected to include new measures that will affect the provisions for foreclosure and stricter controls on reserve capital. The influence of insurance and other institutions as new real estate debt providers is starting to emerge. A year after establishing a dedicated lending team, Legal & General has made its real estate lending debut this quarter, providing a 121 million 10-year loan to UNITE Group student accommodation developer and manager. Allianz Real Estate has entered the French property lending market with the origination of a 275 million loan in a joint venture with Société Générale, and AXA s real estate lending programme has expanded much faster than initially expected. However, this group of lenders is, and will remain, heavily focused at the core end of the market, and thus on their own do not offer a broader solution to the European debt market. Page Ltd

6 MarketView European Capital Markets MARKET OUTLOOK The fall back in investment activity in Q1 compared with last year was disappointing, although not entirely unexpected. Given the downgrades that have been made to economic growth forecasts since the middle of last year, some sort of reaction was likely. The pipeline of large transactions that are in hand, but not yet completed, suggests that the figures will recover in Q2, although perhaps not yet to 2011 levels. The setback in the recovery of the European economy also seems to be causing a political reaction. Public dissatisfaction with the unrelenting diet of austerity is showing through in election results, such as François Hollande s victory in the French presidential election, the rejection of the main political parties in Greece and the collapse of the coalition government in the Netherlands. Politicians around Europe are trying to avoid being blamed for the actions needed to bring government deficits under control. Pressure is growing for some form of austerity plus, which offers voters the hope of future growth. The result is uncertainty, particularly with regard to what shape any new policy would take and already this has led to substantial falls in Europe s equity markets. The effect for real estate is that buyers take even longer over making long term commitments. However, this very uncertainty also makes the relative stability of returns from prime real estate more attractive. Therefore, while in the short term the level of investment activity might fall, it should also lock in place investors focus on prime maintaining values in that segment of the market. The biggest change in actual market conditions (rather than sentiment) that has occurred over the last quarter has been the further deterioration in debt availability. This is despite the improvement in general bank solvency that has resulted from the 1 trillion of three-year debt that the ECB has made available to banks. At the moment the market for prime property is not particularly sensitive to debt availability. Many of the current buyers are equity-only investors and for those that are using low levels of debt the growth in lending from insurance companies is providing an additional source of capital. However, this does further cement the polarization of the investment market between prime and secondary, putting off still further any significant recovery in the value of non-prime property. In fact looking at other data the European Valuation Monitor and UK Monthly Index suggests that values in that part of the market are continuing to decline, whilst the indictors for prime property alone suggest thatt values are generally stable. Disclaimer 2012 Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or epresentation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by clients, and cannot be reproduced without prior written permission of. Copyright 2012 Ltd is the market leading commercial real estate adviser worldwide - an adviser strategically dedicated to providing cross-border advice to corporates and investment clients immediately and at the highest level. We have 400 offices in 58 countries across the globe, and employ 24,000 people worldwide. Our network of local expertise, combined with our international perspective, ensures that we are able to offer a consistently high standard of service across the world. For full list of offices and details of services, visit Page Ltd For More information regarding the MarketView, please contact: EMEA Research Michael Haddock Senior Director, EMEA Research t: e: michael.haddock@cbre.com Iryna Pylypchuk Associate Director, EMEA Research t: e: iryna.pylypchuk@cbre.com Catherine Bushnell Senior Analyst, EMEA Research t: e: catherine.bushnell@cbre.com EMEA Capital Markets Jonathan Hull Managing Director EMEA Capital Markets t: e: jonathan.hull@cbre.com John Welham Executive Director EMEA Capital Markets t: e: john.welham@cbre.com