Europe's firms face falling values and stagnant rents: Moody's

The fundamental credit outlook for European real estate investment and development companies is negative, according to a new Moody's Industry Outlook report. Tighter and more costly credit has resulted in slowing property investment, driving values down throughout most of Europe, with the UK likely to be hit the hardest.

The rating agency expects that trends in real estate to remain localised, as each market reflects its own economic realities. Demand for offices, retail and other commercial property is cooling in most regions, with the exception of parts of Central and Eastern Europe, and rental growth is slowing or even declining in some cities. Moody’s believes the outlook for the European real estate sector will remain negative for the next 12 to 18 months.

'So far in 2008, signals are mixed with regard to how seriously the European real estate sector will be affected by a spreading of economic contagion from the US. On the one hand, financing is difficult to obtain, creating a dearth of investor demand and causing property prices to drop. On the other hand, as a whole the region's economy is relatively healthy and the fundamental drivers of occupier demand for property are still in place. However, even those drivers are beginning to weaken as companies readjust their space requirements in light of shifting economic conditions and financing becomes more costly,' said Lynn Valkenaar, a Moody's senior analyst.

Moody's expects the fall in property values to be compounded by declining rents on the back of a slowdown in tenant demand. The fall in property values was itself largely caused by the sub-prime market fallout for financial services companies such as banks and mortgage lenders - to a greater extent in the UK than other parts of Europe, so far at least - rather than by an economic downturn across Europe. However, the financial industry crisis has dented business confidence and has the potential to hurt the broader economy.

A drop in occupier demand could ultimately set in motion a longer-lasting downturn in the property sector, Moody's cautions. However, in some markets, yields on property are rising faster than borrowing costs, creating opportunities for those with funding capacity.