Quality key to European property investment

Continental Europe will experience a more gradual and protracted correction in the commercial property markets compared with the more rapid re-pricing seen in the UK, according to the latest research from Scottish Widows Investment Partnership (SWIP). SWIP expects returns to continue to slow across Europe this year before recovering in 2009. On a risk-adjusted pricing basis, SWIP believes the UK market currently looks more attractive as asset prices have already fallen significantly from their mid 2007 peak.

While investment volumes in continental Europe are expected to be down this year compared with 2007, there is still a significant amount of capital targeting continental Europe. German open-ended funds saw strong cash inflows in 2007 and are likely to be buyers in 2008 as are sovereign wealth funds. For global property investors, Europe is expected to remain attractive compared with other markets on a risk adjusted return basis, especially as we move into a more turbulent global economic climate.

SWIP expects the market correction to occur at different times and rates across continental Europe, creating opportunities to exploit pricing anomalies, creating buying opportunities in the next six to 12 months.

Looking at the outlook across continental Europe, rental growth in 2008 and 2009 is forecast to be subdued with the strongest markets being the office sectors in Belgium, Germany and the Netherlands, retail space in Germany, the Nordic region and Central and Eastern Europe and warehouses in Benelux, Germany and the Nordics.

Overall SWIP believes that Germany offers liquidity with fewer economic downside risks. Having the largest and most diversified economy in Europe, Germans also tend to have lower levels of personal debt compared with their European counterparts.

The outlook for Central European property markets is mixed, according to SWIP. Yields in some of these countries have fallen aggressively and perhaps too far, in terms of their liquidity and transparency. As yields re-adjust though, SWIP expects the economic growth forecasts, and its relative isolation from the US sub-prime crisis, to make Central Europe more attractive to investors.

Robert Matthews, Head of International Property at SWIP comments:

"Compared to the UK, Europe has seen a more gradual drop in commercial property prices and we expect these prices to fall further, particularly for secondary stock. A key feature of the European property market over the next 12 months will be a flight to quality, with investors favouring larger, more liquid markets such as France and Germany.

"The era of rising commercial property values and cheap borrowing is over and investors will increasingly base their decisions on property fundamentals such as rents, location, supply and demand and development opportunities. Despite the apparent difficulties presented by a downturn in European commercial property, price corrections will offer professional investors exciting opportunities to add value by identifying and exploiting pricing anomalies."