GLOBAL - A break-up of the euro-zone would place downward pressure on rents in Europe and Asia, while US real estate markets might actually stand to benefit, according to a new report by DTZ.
The 2012 Global Outlook, published today, claims market participants are invariably predicating forecasts on a downside scenario involving the break-up of the euro-zone and limited fiscal and monetary policy flexibility.
Under these circumstances, Asia stands to experience a larger than expected short-term impact on rents. "It proves to be a temporary decline, as the upward economic momentum triggers a strong rebound later in the forecast period," the report projected. "However, it does offer a short window of opportunity for occupiers to re-negotiate their leases."
The downside impact on European rents will be more enduring. In response to a webcast question this morning, global head of forecasting and strategy research Tony McGough said the French market was particularly exposed because it has had recent strong rental growth.
"If the recession hits, the market is fully priced and it will feel the full impact," he said, pointing to its vulnerability as a major trading partner with Spain and Italy - two of the countries most likely to leave the euro-zone in the event of a breakup - and French banks' exposure to Italian debt.
According to the report, few investors are considering a potential upside scenario involving "corporate reawakening" and the deployment of built-up capital reserves. "All it would take is for confidence to return and euro-zone debt issues to be successfully resolved for them to spring into a more active mode," it said. "This would push forward demand and growth around the world. There is a possibility this could occur."
Such a scenario could make less risk-averse investors look favourably on good-quality secondary. Recent DTZ research showed vacancy rates to be lower for secondary assets than prime real estate, with available space lowest among grade-C offices. McGough said this was an indication of cash flow stability.
Under both upside and downside scenarios, US values are expected outperform the base case (which assumes a resolution to the euro-zone crisis) because of forecast tightening of yields.
"Ironically, the US - having helped cause the global financial crisis to begin with - actually shows a positive impact on values from the downside scenario," said the report. "This seems perhaps counter-intuitive. But, this positive effect on office and retail values in particular is due to the projected tightening of US government bond yields and required property yields, and the limited downside in rents."