EUROPE - Rents will fall but much of the European office market is likely to remain positive in the near future, even though at least 20% of the tenant base in major cities is in financial services, suggests Pramerica.

A quarterly review of the European real estate by the asset management firm suggests office market returns will be largely positive across Europe, with the exception of UK, Ireland and Spain, while central and Eastern Europe will display especially strong gains.

Pramerica acknowledges the office rental cycle may have peaked in the last quarter of 2007 but suggests there are now "widening" variations in market performance as market exposure to the credit crunch and supply are likely to indicate whether rental income will fall.

"Despite forecasts of weaker employment growth, the constrained supply pipeline suggests that the growth in office rents is likely to remain positive in most markets," said Pramerica in its July 2008 European Quarterly Market Perspective.

More specifically, eastern office markets such as Russia and Turkey are "recording strong rental growth, as demand is outstripping the limited supply of Class A stock.

Cities with an over-supply of office property, such as London and Dublin, are putting downward pressure on rents, the firm has found, and the UK, Ireland and Spain are showing "low or negative rental growth" as a result of the tighter credit markets.

That said, this is in stark contrast to the rest of Europe which has seen net additions to the supply chain of around 2.5% a year - with the exception of the fast-growing Eastern markets where the supply is rising by over 10% a year - albeit this is down from a historical average of 3.2% over 10 years.

Stockholm, Frankfurt and Amsterdam are all still said to be suffering a recent boom of supply and therefore have "double-digit vacancy rates" compared with the 8% long-term average.

But Paris, Prague, Frankfurt and Stockholm all saw "recorded accelerating rental growth in Q1'08, despite the fact that 20% of more of the tenant base is each market is financial services" continued the asset manager.

"Still, it is not clear how long this resilience can last and rents are likely to fall over the next 12 months."

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