Rental decline will drive further capital value falls: CBRE

Yield shifts have accounted for the majority of capital value declines so far in this downturn due to the re-pricing of risk, but rental declines are expected to become the main driver of capital value falls throughout 2009, according to CBRE's MarketView report on European Capital Markets for the first quarter of 2009. The EU-27 Prime Yield Indices moved out by 30 basis points (bps) on average in Q1 2009, following sharp increases (40 bps) in the last three months of 2008.

The latest CBRE research suggests that prime yields will stabilise in some markets in the coming months due to the scale of re-pricing that has occurred so far and the absolute levels of yields. London, Madrid and Paris are markets which are approaching the next stage in the cycle and thus generating some investor interest, with prime yields having moved out from being some of Europe’s lowest at the top of the market to the current yields close to long-term highs.

The UK market, having been the first market in Europe to face the downturn in the cycle, offers more supporting evidence on this. The latest CB Richard Ellis UK Monthly Index reported rental falls as the main component of capital value decline for the first time in this cycle. Falling rents contributed 1.6% of the 2.8% capital value decline during March 2009.

Michael Haddock, director of Capital Markets Research for CBRE in the EMEA region, said: 'UK investment market activity looks to have reached the floor at around EUR 4 bn in Q1 2009. Following the very rapid yield corrections so far, investor interest is starting to pick-up, certainly towards the prime end of the market and particularly in London. The UK looks set to be the first European market to see recovery in investment activity. However, it is the underlying tenant demand and extent of development pipeline that will shape the pricing in the mid-term.'

Over the first quarter of 2009, the economic outlook has been continuously downgraded, with a number of indicators declining more markedly than initially expected. All but one EU-27 economies are expected to contract, the exception being Poland where the 2009 GDP forecast is stagnant at 0.1%. Amongst these, the UK is the only market to have started to see a degree of consensus over the next couple of years’ forecasts, whilst uncertainty over economic performance remains high for most of Europe.