European property values to peak by end of decade - DeAWM

Real estate values in the EU will peak at the end of the decade before falling back as the development cycle picks up, according to analysis by German fund manager Deutsche Asset & Wealth Management (DeAWM).

In its latest strategic outlook, DeAWM said returns on investment would average around 10.0% over the next two years as yields edge down and rents increase.

Towards the end of the five-year forecast period the falling trend in yields is expected to reverse, with rental growth cooling off, pushing value growth ‘into negative territory in the majority of European markets’.

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DeAWM’s analysis noted that commercial property transaction volumes in Europe increased by almost 20% last year to top €160 bn. The UK is the most active market, accounting for nearly one-third of all transactions, with the UK regions taking up a 50% share as investors look for value outside London.

Recovering markets
The strongest growth in investment volumes came in the recovering peripheral economies of Spain and Ireland, with Irish property volumes reaching a record high of €3.8 bn. Spain and Ireland also saw the strongest yield compression as capital values increased. At the other end of the scale, Poland saw activity fall by 10.0% in 2014.

Initial estimates suggest office vacancy levels across Europe fell from 10.5% to 10.0% by the end of 2014, which combined with modest GDP growth of around 1.0% pushed rent growth to an estimated 3.0%. Analysts forecast annual rental increases of 3-4% in the near term, though the gap between in-demand central locations and struggling non-core areas is likely to remain wide.

QE
The European Central Bank’s quantitative easing programme is also predicted to drive investors towards property as the outlook for Eurozone bond yields is downgraded, combined with the anticipated fall of the Euro against both the US dollar and the UK pound.

As construction volumes pick up to meet demand for high quality stock, the rental recovery is expected to slow to around 2.5%. Prime returns will also diminish, particularly in the UK, where steeply rising yields could bring them down to zero.

Spain is expected to be the standout performer as it recovers from a 40% decline in prime office rents since 2007. Despite the revival, core European rents will remain below their pre-recession rates in 2019.

Opportunities will remain in second-tier markets and cities, particularly in Germany, while mature global markets such as London and Paris, which have the capacity to diversify, will still be attractive to some long-term investors.