Recovery in Europe’s commercial property markets is progressing at different speeds against a mixed economic and political backdrop.

Recovery in Europe’s commercial property markets is progressing at different speeds against a mixed economic and political backdrop.

Confidence is seeping back into many of Europe’s real estate markets on the back of a broader economic recovery as countries pull out of recession, according to RICS’ Global Commercial Property Monitor for the first quarter of 2014. But a degree of divergence appears to be emerging across the euro area as the recovery gains traction in some member states, while progress in others stalls.

Although most of Europe’s crisis-hit countries saw sentiment rebound in Q1, Russia experienced a sharp decline in both the occupier and investment markets. The slowdown in Russia suggests that confidence has been undermined by geopolitical tensions and the ongoing slowdown in economic
activity, with the risk of recession now looming. ‘The situation in the commercial real estate market, as well as in the economy as a whole, is characterised by a high degree of uncertainty, which undoubtedly has a negative impact on the investment climate and demand,’ said Maria Kotova MRICS, a partner and executive director with Knight Frank Russia & CIS.

Total Russian investment fell by around 35% to $635 mln (€463 mln) in Q1 2014 compared with the year-earlier period, with volumes divided equally between retail and offices. Kotova expects the foreign share of transaction volumes to decline further this year. ‘We don’t expect any significant changes in the current situation any time soon. The trends at end-2013/early 2014 are set to continue. Consumer demand in many regional cities is falling as well as the turnover of some retail businesses. Meanwhile, the construction of new trading centres is continuing as planned, which will result in a record volume of retail space being delivered this year in Moscow. This, in turn, will probably boost vacancy rates, which could reach 7% by 2015.’

The monitor – which reflects the views of professionals ‘in real time’ – found that sentiment remains particularly downbeat throughout France and the Netherlands, despite both of these countries exiting recession during the latter part of 2013. In France, occupier sentiment remained negative, with demand continuing to slip at the headline level and within the office and industrial sectors in particular, although demand for retail space was stable.

Unsurprisingly, inventory increased across all areas of the market, particularly in the office sector. At the same time, landlord incentive packages also picked up, marking the 11th quarter in succession in which they have done so. ‘Given this backdrop, it is not surprising that rents remain under pressure within all sectors although the pace of decline may be starting to ease marginally,’ said Karl Delattre FRICS, chairman of RICS France.

As in the final quarter of 2013, investor sentiment was broadly neutral in Q1 2014 although investment enquiries increased throughout all sectors for the third consecutive quarter. This is expected to translate into an increased number of transactions going forward, according to the RICS data. ‘Despite this, capital values are projected to see little change in the near term at the headline level, although
the office sector may see a marginal decline,’ Delattre noted. ‘The supply of distressed property is anticipated to pick up, once more, while demand for such property struggles to keep pace.’

By contrast, a significant improvement in sentiment is now visible in Ireland, Spain and Portugal. In fact, investment transaction expectations are now higher in these three markets than in any other countries in the RICS survey. The brighter outlook is not confined to the investment side. With unemployment falling, occupier demand is rising and rents are expected to increase as the year progresses. Significantly, in Ireland both the three- and 12-month rental expectation indicators are firmly in positive territory.

Commenting on the Spanish market, Eduardo Fernández-Cuesta MRICS, chairman of RICS Spain, described the first quarter as ‘spectacular’. ‘The main news is the amount of money willing to enter the Spanish real estate market,’ he said. ‘The market fundamentals are also improving, and thus in Madrid, the rental office area amounts to 100,000 m2, representing a 20% increase on the first quarter of 2013.’ Investment figures were also positive, he said, reaching €988 mln in Q1, double the amount of the first quarter of 2013. Fernández-Cuesta cites three main reasons for the increase: structural reforms and confidence in the economic development of the country, price adjustment and excess of international liquidity. He does not believe the excess liquidity will result in a new market bubble. ‘We are not in a new bubble since the main market players are different and they act in a different way. Investment criteria are based on a thorough study of the market and the assets to be acquired.’ However, investors must be vigilant, he warned. ‘The Spanish market is very narrow and investors’ preferences are similar regarding
product type and geographic location. There will be no product for everybody and only the best will succeed.’

As in Ireland and Spain, confidence is also coming back in Portugal, according to Eric Van Leuven FRICS, chairman of RICS Portugal and managing partner at Cushman & Wakefield. ‘In Portugal sentiment has also improved a lot, thanks to the better economic results and the rise in confidence,’
he said. ‘Expectations are also positive in terms of activity in both the investment and occupier markets,
which should soon translate into capital value growth in sales and rents.’ Meanwhile, the performance of the UK and German markets remains particularly strong, in keeping with recent results and macro data, the RICS survey found. ‘Although the euro crisis isn’t over, the German economy remains stable,’ commented Jens Giere MRICS, director of real estate services at Persch Consult GmbH Chartered Surveyors in Germany. ‘We have seen a corresponding development in the commercial property market
with retail transaction volumes in particular showing an increase in Q1,’ he said.