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European rents and yields for Q1 2013 show a degree of resilience at the prime end of the market, despite the weak short-term economic outlook.
There was widespread incidence of yield improvement in the office and retail markets, and the yield indices for both markets edged lower over the quarter.
The key City of London office and West End retail markets were among the places where yields edged lower, along with other significant office markets including Dublin, Geneva and Prague
Rents generally saw little movement, although the prime retail rent index for the EU-15 rose by 2% in the quarter and is up nearly 7% over the past year.
Rental change in the business space markets showed a more distinct north-south pattern: for instance, rents dipped in the office markets of Milan, Madrid and Barcelona and rose in Berlin, Dublin and the West End of London.
For the first time in six years, total 2012 T&T office take-up in the main European markets was greater than banking and finance sector, with the T&T sector exhibiting clustering tendencies in certain cities.
Talent acquisition and retention is increasingly driving location and growth strategies for the sector at a global level. In Europe, the movement of STEM roles indicates a shift of talent availability from Western to Eastern Europe.
Given the longer gestation of real estate supply, CRE leaders in the sector need to be closely aligned to talent market development in order to facilitate “speed to market” for their organisations.
The Banking and Finance Snapshots cover some of the top sector locations in the EMEA region, providing an overview of prime rents, rental forecasts, recent transactions, market commentary and sector specific 'news and views.
Leasing activity increased on the quarter, but was down on the strong numbers recorded in 2011. Occupiers are continuing to consider all possible solutions when it comes to leasing decisions. Supply constraints in some core markets are forcing occupiers to move into more peripheral space, but generally the preference is for better quality space for operational efficiency reasons.fm
Rents remained stable over the quarter, but are down on year ago levels. The relative lack of prime space is underpinning rental stability in many markets, but there is continued divergence between Southern Europe and countries in the West and North. Rental growth was evident in Russia, Germany and the Nordics.
Investment – Transaction volumes improved quarter on quarter in Q4, and the total for the year was marginally up on 2011. The UK continued to dominate the market in this sector, followed by activity in Germany, France and CEE. The majority of investors sought core assets in cities with stronger economic prospects.
Prime rents were unchanged in the majority of markets in Q4. However, London, Paris and Berlin, three of Europe’s top retail and tourist destinations, all saw significant rental growth, with increases of 15-20% in the year as a whole. This was due to the limited availability of prime space and significant demand from international retailers for the best units. In contrast, vacancy rates are rising in secondary locations and in most of these markets rents are falling.
Consumers are facing the challenges of high unemployment, the threat of further job losses and austerity measures, creating an uncertain economic environment. As a result, confidence levels remain well below long term average levels in most markets. Consumer sentiment did improve slightly in some markets, most notably in Ireland, but the overall EU indicator fell marginally, by 0.1 point, in December 2012.
Retail sales in EU-27 declined over the important Christmas period, in line with retailer expectations, but only in Spain and Portugal were these declines significant. A number of retailer failed across Europe as a result of the tough trading conditions, but there were still winners. Sales grew strongly in Russia, value and luxury retailers performed well and some multichannel retailers reported excellent growth. In 2013, retail sales are forecast to recover slightly, resulting in flat growth for the year.
362 respondents from across the European real estate investment industry.
Germany most favoured market in Europe in 2013 – up from last year. UK 2nd, down from last year. CEE overall less popular than 2012 but Poland 3rd most attractive market, ahead of France, Spain, Italy, Netherlands, Nordics.
London is single most attractive city (31% of votes). Munich in 2nd place (16%), Berlin 3rd (9%) and Hamburg and Frankfurt also in top 10.
Other cities in top 10 : Paris, Warsaw, Dublin (notable relative to size of market), Madrid and Amsterdam.
A return to positive retail sales growth is forecast in 2013 as retailer sentiment improves slightly in Europe.
Christmas trading was tough, in line with expectations. The volume of retail sales in the European Union (EU-27) fell slightly, by 1.5% in December y-o-y.
The strongest sales growth was in Russia, the Baltics and the Nordics. Southern Europe continues to be was the weakest performing region.
The challenging economic environment has revealed a growing polarisation between winners and losers. Over Christmas, the major winners included many multichannel retailers and those in the luxury and value sectors.
Multichannel retailers are increasingly the main driver of growth in the online sector, with the majority of them looking to increase their physical store presence.
Offices were the best performing commercial real estate sector in Q4 2012
Across the sectors measured by CBRE, offices recorded a fall of just -0.5% in capital value, with positive performance in France, UK and the Nordics.
European capital values remained broadly stable, registering only a marginal decline of 0.8%. However, this does bring CBRE’s pan-European index to its lowest point since Q3 2009.
France and Germany saw values dip marginally over the quarter, (-0.2% and -0.1% respectively) both resulting in an annual decline of 0.5%.
CEE saw capital values decline by 3.9% and 2.2% in Q4 alone. The office sector, which has a significant development pipeline, weighted this result down, including in Poland (the region’s best performing country) where capital values fell in 2012.
Southern Europe and Ireland saw a decline of 4.0% in Q4 and 12.1% over the year, the result of weak economic sentiment and low levels of investment liquidity.
The significant revaluation of assets in this region, particularly across Spain, Portugal and Ireland, given the scale of the repricing, could come to represent good buying opportunities.
The final quarter of 2012 recorded the highest level of take-up of the year, driven by an upturn in confidence in a number of key Western European markets. However in southern Europe and fringe CEE the markets continued to be characterised by a lack of large deals and high renegotiation rates.
Overall vacancy rates generally remained flat, however this hides significant variations both in terms of the quality and location of available space.
Rental levels followed the same pattern as the first nine months of the year, with prime rental growth restricted to the best performing markets and further declines recorded in some of the southern European economies.
The development cycle reached its cyclical low in 2012 but is forecast to increase sharply in 2013-14 however this is heavily focused in a few key cities. Outside these locations the speculative pipeline remains low, and occupiers requiring prime existing space will have limited options.
The ECB’s commitment to unlimited bond purchases, where necessary, in the euro periphery has calmed sovereign debt markets and helped underpin some signs of improvement in market sentiment and business confidence at the start of 2013.
European economies still face a weak growth outlook in 2013 and occupier market trends are likely to be little changed in the next 12 months. Rental growth will remain elusive.
Both occupational and investment markets in European real estate will continue to show marked north-south disparities in 2013, with core markets in the north expected to record stability or even some improvement in pricing for prime property.
The trend for good secondary assets in stronger markets to attract greater investor interest looks set to gather pace in 2013.
The real estate demands of logistics for online retailing differ from traditional store-based retailing in various ways including labour requirements, proximity to multiple delivery destinations, process capability and integration with parcel delivery networks.
Online retailing creates a need for logistics networks and buildings to accommodate a different and more fluid set of demands. Supply chains may take a variety of forms due to multiple destination points.
Customer demands for a higher quality “delivery experience” are driving change and are a major differentiator for retailers. This raises the need for highly-flexible networks including smaller delivery depots and cross-dock facilities close to major population centres. .
This pivotal point in the relationship between retailing and logistics in Europe will offer significant opportunities to those able to respond to occupiers’ highly dynamic requirements in this fast-maturing sector.
While Switzerland has been relatively spared by the European crisis in previous years, it seems the impact is starting to be more strongly felt within the corporate sector. The pressure is increasing on banks notably and the unemployment is slowly rising. Even if the overall state of the economy remains better than in many other European countries, the year 2013 will certainly prove to be challenging.
In Zurich, cost reductions, space consolidations and relocations are the key market drivers. This causes the CBD rents to be under pressure and the availability is expected to increase.
In Geneva, the CBD remains in demand with decreasing availability and stable rents while availability is set to increase in the outskirts. The investment market remains very attractive for both national and foreign investors.
Since 2008 London Has Attracted 41% of Property Investment from outside Europe. This current influx of international capital is qualitatively different from previous foreign investment flows into Central London property.
Sovereign wealth funds and cash-positive pension funds from Asia and the Middle East are becoming increasingly prominent in the market; these investors have particularly long investment horizons
A number of factors are driving SWF and cash-positive pension fund investment activity at present, namely insufficient domestic investment opportunities forcing capital overseas; diversification from domestic economies; and domestic regulatory change giving the potential for sizeable amounts of capital to flow into the real estate market from the pension fund industry.
Low interest rate environments are intended by governments as a way of stimulating economic growth by encouraging business investment. However, those same low interest rates have created a significant barrier to banks working out their legacy of non-performing real estate loans.
Created as a hedging instrument, swaps were intended to protect real estate loans with high LTVs, which typically have low interest rate cover, against interest rate rises.
However, as the financial crisis drove interest rates down to unprecedentedly low levels, these instruments have become increasing burdens on investors and, in the case of distressed sales, the recovery of value to lenders.
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