EUROPE - European real estate markets may not have felt the impact of the recent market turmoil, but this is set to change, according to German real estate company IVG, which sees significant risk of another recession.

In its most recent 'Market Tracker Europe' newsletter, IVG said the recent decline of business climate indicators in Europe and the US, as well as the volatility of stock prices, pointed to "slow economic expansion".

At the moment, there is "no direct negative impact measurable on the real estate markets", IVG said.

However, it sees the risk of "another severe economic recession" due to the "unsolved sovereign debt crisis and price bubble on some government bond markets".

It said this pending risk further weakened letting demand as investors took a 'wait and see' approach.

"But as completions will remain low in the next two years due to a lack of finance and cautious developers, at least high-quality space is expected to become more and more scarce," it said.

Therefore, unless there is another recession, the company expects prime rents to "trend upwards further slowly, or at least remain stable".

While IVG quotes statistics on a "first significant decrease of the pan-European vacancy rate since 2008 from 9.9% to 9.7%", the share of vacant space in decentralised locations and of inferior quality is increasing.

This trend will lead to further "market polarisation", and some further prime yield compression is possible in markets with a "high-yield gap to government bonds in spite of weaker rental growth expectations", IVG said.