EUROPE - Continental European property yields will follow the widening UK trend in 2008, "though not to the same extent", according to Tony Horrell, CEO of European capital markets at Jones Lang LaSalle.

Speaking as the firm published its European Capital Markets Bulletin 2007, Horrell said European yields would likely move out but suggested the mature European market "needs to move on a bit".

According to the report, direct investment in commercial European real estate totalled €244.1bn in 2007, down 4% from the previous year. Compared with a 22% fall in UK volumes to €71bn, continental European volumes grew 7% to €173bn - despite a tightening credit market.

"In the UK, owners and potential purchasers are talking," he said. "It's different on the continent" where pricing "misalignment" remains an issue.

Yield movements encouraged a 4% fall in capital values towards the end of the year. The office market suffered most, with a drop of 5%, while retail and warehousing also fell.

"There still remains a vast amount of equity and there's still money to spend. But no-one will be taken for a fool. They want fair value," said Horrell.

The second half of 2007 also saw a bias towards domestic deals after a first half in which cross-border deals accounted for €153bn (63%). JLL interpreted the swing as investors "seeking comfort" in domestic markets.

Although he stopped short of suggesting the UK was already seeing a return to fair value, Horrell believes re-pricing will make it a target for property investors in 2008.

It remains to be seen whether UK pension funds which have diversified into continental Europe will return in the short term. "There's a bigger revolving interest in the UK at the moment - from investors small and large," he said.

"Of course, there are places in Europe with some level of growth to go, which will attract opportunistic investors. I can't see Irish investors investing in Ireland this year. They'll invest in the UK."

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