C&W: European investment falls 37% in Q1

The full force of the credit crunch is now being felt by the European commercial property market, consultant Cushman & Wakefield (C&W) said in a new research report released on Tuesday. Investment volumes in the first three months of 2008 fell 37% compared with the year-earlier period, while yields rose at their fastest rate since 1992, the report said. With confidence shaken and uncertainty over pricing impacting almost as much as the lack of affordable debt, the market is ready for more to come, C&W said.

To date, however, the occupational side of the market has held firm, C&W said, with prime rents rising 11% in the year to March. As a result, total returns have remained in positive territory, with an all-sector prime average of 7.1% for Western Europe. The question now, according to C&W, is whether such a performance can be sustained once the economic impact of the financial market turmoil starts to show in job cuts, tighter borrowing and increased risk-aversion. In addition, the threat of stronger inflation highlights the continuing downside risks to performance.

'We currently expect rental growth to ease to around 3-4% at best this year,' said David Hutchings, head of European Research at C&W. 'However, with markets in general not oversupplied and development being cut back by current trends in financing, building costs and risk appetite, an upturn in the market in 2010 could well deliver strong performance for investors. A growing number of equity investors appear ready to take advantage of this and look set to re-enter the market as soon as financing markets stabilise.'

According to Michael Rhydderch, head of the Cross Border Capital Market team at C&W, deals 'are taking longer and the due-diligence process is more protracted. Where funding is required, the extra scrutiny put in place by the banks adds further to the delay and uncertainty of transactions actually completing.'

Most markets have seen a decline in activity as uncertainty has spread, with only a handful, including Austria, Bulgaria, Denmark and Finland, seeing trading improve on the first quarter of 2007. Spain and the Netherlands also saw an improvement on the back of large portfolio deals. In the UK, after marked falls in recent months, activity has at least stabilised, with the first quarter nearly matching the performance of late 2007. Somewhat against expectations, it has been cross-border buyers who have reduced activity the most - with their share of purchasing down to 47% against an average of 54% in 2007. In part this reflects the drop-off in larger portfolio and trophy asset deals, an area dominated by foreign players.

Yields for prime space rose on average 12 basis points in the first quarter, taking their increase since last summer to 35bp, with offices most affected. Secondary property has seen yields shift by 75-100 bp in most areas over the period. According to Hutchings, 'a further 15-25bp increase is yet to come for prime and 50-100bp for secondary, but as ever an over-reaction may be seen, particularly given the downside risk to economic growth.'

'On balance, the market will see further pain in the months ahead - with yields yet to peak and rental growth slowing - but in the latter part of the year, a firming in economic confidence allied to an increased supply of opportunities, should be the catalyst for a steady recovery in activity,' said Hutchings. 'We currently expect total trading of EUR 180-190bn, some way down on the 2007 record, but ahead of recent performance.'