Europe faces two principal macro challenges for the remainder of the year and into 2011: the ongoing concerns over government debt and the removal of economic stimulus. Both factors have a direct impact on the region’s economy and consequently on corporate occupational demand, but also influence property through the cost of debt and property’s pricing relative to other asset classes.
Europe faces two principal macro challenges for the remainder of the year and into 2011: the ongoing concerns over government debt and the removal of economic stimulus. Both factors have a direct impact on the region’s economy and consequently on corporate occupational demand, but also influence property through the cost of debt and property’s pricing relative to other asset classes.
Thiese are the key conclusions Jones Lang LaSalle draws for Europe in its latest edition of Global Market Perspective. Economic recovery is proceeding at a different pace across Europe, the adviser noted. While business confidence has returned, it is fragile and outside of a few sectors - notably core financial markets - hiring will be slow to return as will the demand for office space. 'This will have a significant knock-on effect for consumer spending and consequently for retail and industrial property. Although corporate profit growth and job creation will gradually speed up, the pace will be modest over the next six to nine months.'
The report signalled that although a bounce-back is underway in some investment markets, there is a question whether the pricing of property has got ahead of fundamentals. 'In a world where every asset class carries risks, the argument is in favour of the best prime property,' the adviser said.
The risk of default in Southern Europe has abated and focus has shifted to long-term fiscal austerity plans which, with government spending cuts across the region, will act as a long-term dampener on economic growth. As a result, the adviser sees interest rates rising in the next 12 months, if not sooner. 'A rising risk-free rate, higher inflation and soft economic growth imply an uncertain outlook for property, both occupationally and as an investment class.'
According to Jones Lang LaSalle’s UK Real Estate Investor Confidence Survey, investment sentiment remains positive although it has tailed off slightly during Q2 2010 compared to the previous quarter. This is partly due to the perception that prices have risen too sharply against the weak economic and occupational backdrop. Retail funds that were bidding aggressively at the end of 2009 and beginning of 2010 are now being more selective. What is more, much of the price correction in the commercial real estate investment market has already occurred and there is growing concern as to where performance will come from in the absence of further inward yield shift and weak occupational demand.
As the supply of available assets has risen, institutional investors have reined in their appetite for real estate, and fund flows from individual investors have slowed. However, the demand for high-quality assets with secure long-term cashflow in the major markets in the UK, France and Germany is still very strong. In the UK the market is starting to polarise between London and regional centres, with concerns that public spending cuts will have a greater impact on the regional economies and real estate markets.