Industrials to lead commercial property sector recovery

Industrials will be the strongest performing sector in European commercial property in 2010 as subdued consumer spending continues to impact the retail sector, according to Fidelity Real Estate Investment Management (FREIM).

Matthew Richardson, Head of Research at FREIM, believes industrials will continue to offer high and attractive yields in 2010. However, he expects the sector's outperformance to fade by 2011 as the retail and office sectors catch up.

Richardson comments: "We think the retail sector will be the weakest performer in 2010. We have a neutral rating on the sector and will invest opportunistically. We take the view that consumer spending will remain subdued, particularly in the UK, Ireland and Spain, where consumers will be focusing on reducing their high level of indebtedness."

"We expect a further correction in retail yields relative to office and industrial yields, given the more mixed outlook for the sector. The prospects for capital growth in retail rely more heavily on rental growth and there is little prospect of that until 2011, although specific sub-sectors may offer short term capital growth from yield compression, such as high-quality, large-scale retail warehouses."

The recovery in European commercial property began in 2009 with prime quality properties in London and Paris. Richardson says the recovery in these two centres is already spreading out into other major Western European cities.

Richardson comments: "Broadly speaking, increased risk appetite coupled with improving fundamentals will support investment in real estate in 2010.  Regionally, we tend to favour those countries more able to control their own macroeconomic destinies, which are less susceptible to external economic shocks. The most attractive markets will be UK, France, Germany, Benelux and the Nordics.

"Central and Eastern Europe, Southern Europe and the Baltic states remain too risky until a suitably attractive premium is re-established to tempt investors, many of whom are now much more cognisant of the extra risk involved in these markets.

"Opportunistic investors will begin to take advantage of ‘points of light' in some of these markets by the end of the year, notably Madrid and Barcelona, provided values become more realistic. And, as we move through 2010, Italy and Ireland could also offer some interesting deals for shrewd investors, looking to take on risk."

However, Richardson warns that pan-European investors should focus on markets in core northern and western European countries.

"While now is very much the time to buy property risk, there is no need to take on additional and unnecessary risk by investing in emerging European or Asian markets at this stage of the investment cycle. Attractive returns are available in northern and western European markets; markets which also benefit from higher levels of liquidity and transparency. Legal title can be quickly and clearly established and independent and established legal infrastructures are in place; something that many bondholders are now more cognisant of in the aftermath of the Dubai debt crisis."