Trading activity in European commercial property rallied in late 2012 as the market stabilised after its midyear malaise to post the highest level of quarterly trading since 2007 at €43.7bn in Q4, according to the latest data from property consultants Cushman & Wakefield.
Whilst the year ended only marginally up on 2011 (up 1.5%) with total volumes reaching €133.8bn, indicating that this peak was more of a correction than a strong sustained recovery, the report predicts that recovery in the sector will start to gain momentum in 2013. Improvements in economic stability and investor confidence will drive further increases in trading activity against a backdrop of increasing divergence within the sector with some markets seeing strong demand and robust performance as others stagnate.
David Hutchings, Head of European Research at Cushman & Wakefield, commented:
"Risks obviously remain high in much of the region but underlying economic stability has improved and even with a fragile recovery on the cards, this should set the scene for improved confidence in 2013. Property is well priced to attract buyers when the real but secure nature of its performance is considered. As a result we are forecasting a further increase in trading activity this year, with increased bank sales and a somewhat more relaxed debt market pushing volumes up 5-6% to €141bn.
"Economic stability will also help to generate and release some degree of pent up demand among occupiers, with stronger industries and regions adding to a very mixed picture for property. A reappraisal of risk will force a further re-pricing in some areas - with prime yields compressing while secondary yields move out - and new hot spots will emerge even as distressed or uncompetitive markets fall back further in a splintering market."
Investors Focus on Larger Core Markets and the Nordics
Investors are again heavily focused on core, larger liquid markets - although over the year France, the UK and Germany saw their market share slip slightly, to 61% from 62% in 2011. The Nordics have gained ground, with market share up to 17.9% from 15.3% in 2011, with Finland (up 98%) and Norway (up 59%) the most dynamic. Elsewhere in the west some markets slipped, notably the Netherlands and Luxembourg, but Switzerland more than made up for that with a trebling in deal volumes sparked by bank sales.
The main losers by deal volume are closely correlated with macro risk - with the GIIPS (Greece, Ireland, Italy, Portugal and Spain) seeing a 26% fall in activity, taking their market share down to just 3.8% versus a 10 year average of 11%. Other weaker markets included the Netherlands, the Czech Republic and Hungary. The Middle East and South Africa fared poorly, with a near 70% drop in volumes due to the obvious geopolitical risks. Increased corporate and commodity investment could promise a major change in the region's standing in the long term but political stability must be secured.
Cross Border Investment Rises 19% in 2012
Foreign investors across EMEA remain the most dynamic area of the market meanwhile, with a broad range of players from China and other parts of Asia, the Middle East, Europe, (east and west) and North America. Cross border investment rose 19% year on year versus a 3.9% decline in domestic buying. Interestingly, this focused on core markets, with both foreign and domestic players shunning most emerging and indebted markets to a similar degree. Cross border investment in core markets rose 31.4% over the year while domestic buying fell 0.6%. In emerging and distressed markets, both groups of investors cut activity by around 25%. By sector, offices were ostensibly the main winner, with volumes rising 5.6% while industrial fell 9.9% and retail 21.9%. Retail and industrial did however outperform offices in the final quarter.
Slow But Steady Recovery Predicted for 2013 In An Increasing Divergent Sector
2013 is set to see a continuation of many of the trends under way late last year: with the relativity of property yields stoking demand for secure, quality assets and markets and a slow improvement in sentiment filtering in to an increased desire to invest. Debt and stock shortages will again hold back the market however, meaning any improvement in volumes will be slow to emerge.
While debt remains a barrier to activity in many areas, this is to a somewhat lesser degree than had been the case, with the UK the most notable area of improvement. Nonetheless, with refinancing needs being a heavy challenge for the market over the next few years, the main contribution of the banking sector to a healthier market in 2013 may be more as an area of opportunity as they offload stock rather than a source of lending to the sector.
The market will continue to splinter, with risk and performance patterns highly variable across the region and across sectors. As a result investors will be cautious in adjusting risk targets and pricing.
Michael Rhydderch, Head of European Capital Markets at Cushman & Wakefield, said: "The supply of investment stock generally is likely to improve meanwhile as banks increasingly release legacy assets through loan and real asset sales. Although we do anticipate more buyers going up the risk curve in 2013, core markets and strategies are likely to dominate again. Germany in particular will remain a top pick for most investors, with a further gain in its market share forecast in 2013, as in the Nordics. London is also likely to benefit from the safety-first attitude, while Paris will stand out as a long term liquid target for many, even though regional cities could be less favoured."
Demand will remain cautious in most indebted fringe markets, with further pain likely on pricing, albeit mainly for secondary. Risk premiums are likely to fall further if the recent improvements in euro zone stability can be sustained however and this should translate into a slow change in property sentiment, with bargain hunters increasingly ready to act as the year goes by but longer term players also out to find opportunities in some parts of the Spanish and northern Italian markets.
In emerging markets, Rhydderch believes that: "Turkey and Russia are looking good value for those with an appetite for risk and will benefit from their size relative to other eastern countries. In Central Europe, tighter pricing and a slowing in economic growth mean buyers need to be more imaginative to find opportunities in Poland while even though recessions are lingering in the Czech Republic and Hungary, re-pricing has taken place and hence some interesting opportunities are likely as funds and banks restructure?"
Prime Retail Remains Favourite For Long Term Players
By sector offices are likely to outperform in the short term but logistics looks well priced given the increased importance the best space has for retailers and distributors.
According to Rhydderch: "For longer term players retail may be the better area of potential supply despite a fall in market share last year. Top high streets should be particularly favoured in our view, with many benefiting from flagship and luxury retailer demand and attracting funds and high net worth players seeking security and long term growth."