Property looking cheap relative to other asset classes: API

Property markets in Europe have reached a turning point as the performance outlook continues to recover, largely driven by improving capital market conditions, and with the UK setting the trend for the rest of Europe, according to Aberdeen Property Investors (API).

Property looks cheap now, from an historic perspective and relative to other asset classes, API says in its latest European Property Snapshot.

Gert-Jan Kapiteyn, Research & Strategy director for Western Europe, says: 'The timing for investors to increase exposure to European property is actually very good now. However, investors will have to rely less on leverage as a driver of performance in future, as banks will be less willing and able to provide cheap finance. Less gearing in property investment products will also help institutional investors, of whom many are looking for the liability hedging qualities of property investing: high income returns, return stability, inflation protection and portfolio diversification.'

The report states that the European economy is expected to continue recovering gradually aided by stronger manufacturing activity and exports. Domestic conditions are likely to remain subdued in the short term.

Occupier market conditions remain weak, but the pace of decline seems to be slowing with tenant demand stabilising in many markets.

The investment market activity is gaining momentum with German investors and other cross-border investors especially active lately. Prime yields have subsequently fallen in several markets, led by the UK. Investment volumes appear to be stepping up slightly, albeit from very low levels. In the first three quarters of 2009, EUR 43.3 bn was invested in European property, with Q3 investment increasing by 35% over the previous quarter.

The growth in investment volumes seen in the last quarter has largely been fuelled by German investors and international investors focusing on the UK. In the UK, 80% of investment in the first three quarters of 2009 was by overseas investors.

API says it expects investment volumes to continue to rise, particularly in France, as investors begin to look outside the UK. Prime yields are subsequently falling in a growing number of markets, led by the UK, and followed by the more mature and liquid European markets, such as Germany and France. Norway, Sweden and Denmark have also seen stability return.