LONDON, FEBRUARY 19, 2013 – Although the worst of the economic crisis seems to be over, a recovery is not yet around the corner. Office rental growth continues to stagnate and both the occupier and investment markets remain highly polarised with a preference for the strongest and most liquid markets of Northern Europe over riskier assets in troubled Southern Europe economies.
Findings from Colliers International’s EMEA Office Report, published today, suggest that although the conditions for a shift in investor focus away from the prime end of the market are not yet right, the polarised nature of the market provides opportunities for buyers with an opportunistic investment style. Despite this, a more certain economic outlook is needed for a return of greater risk appetite among investors and more transactions outside the prime end of the market.
Craig Satchwell, Head of EMEA Office Business team, Colliers International said: “Times are still tough for businesses across Europe but we are starting to see the light at the end of the tunnel. The pattern of leasing activity continues to highlight the distinct preference for modern and functional office space, typically in locations with good infrastructure. Prime office yields remained broadly unchanged throughout Europe in the second half of 2012 and a modest shift was noticeable in Frankfurt, Stockholm and Paris, while values took another hit in Madrid and Amsterdam.
“Vacancy rates in Warsaw have continued to rise, driven by sustained development activity while in Moscow the office market was primarily driven by banks and the financial sector, as well as by the IT and pharmaceutical sectors.
In Central London the office market saw vacancy rising modestly towards the end of the year, driven by new development completions. However, demand remains robust, particularly in the West End where vacancy levels remain at sub five per cent.”
Key findings include:
Growing polarisation in occupier market: Economic stagnation in Europe continued to hold back rental growth, although regional disparities remain well apparent. Rental increase, for example, was registered in Dusseldorf and Munich, as the vacancy rate in the German office market reached a 10 year low, driven by above average take-up. Noticeable increases were seen in Moscow, Oslo and Lyon. Declines continue to be prevalent in those markets most directly exposed to the effects of the euro crisis such as Madrid, Lisbon and also in Geneva.
Sovereign wealth funds increasingly active investors: Approximately €16.4 billion was invested in European office property in the last quarter of 2012, bringing the full year total to €56.7 billion, down approximately 7 per cent on the previous year. One of the most notable individual asset transactions completed was the sale and lease back of the Credit Suisse global HQ in Zurich to Norway’s NBIM, which followed the sale of the Credit Suisse London HQ to the Qatar Investment Authority earlier in the year.
Wide variations in rental growth to continue: There remain wide variations in rental growth prospects between markets. While further rental appreciation in prime lease rates is still expected in some German cities and Oslo, reductions cannot be ruled out in cities hardest hit by the economic crisis or dealing with quick supply growth such as Warsaw. Rental values are expected to remain broadly flat in the majority of markets, but only for the best buildings and locations, while pressure on rents for secondary space is likely to remain steady or intensify.
Market ripe for opportunistic investors: Over recent years, the direction and profile of investment into commercial property in Europe has been dominated by risk aversion and investor preference for prime properties in core markets. The lack of financing for stock that does not meet lenders’ more stringent criteria has also been playing a role, as have investors’ capital preservation instincts. We do not expect an imminent reversal in any of these drivers. However the polarised nature of the market presents substantial opportunities for opportunistic investors to generate value by repositioning non-prime assets through active asset management.
Looking forward, Dr Walter Boettcher, Economist at Colliers International, concluded: “Bank and business deleveraging, slow employment growth, weak business and consumer confidence continue to hinder an upturn despite accommodative monetary policy. Most economists expect slow or flat growth in northern Europe and another year of recession in southern Europe, although evidence is growing that improving confidence and a resurgence of business investment by mid-year will create economic traction and signs of a sustainable recovery by the end of 2013; offices markets are positioned to benefit greatly when the recovery comes.”