Leasing activity increased on the quarter, but was down on the strong numbers recorded in 2011. Occupiers are continuing to consider all possible solutions when it comes to leasing decisions. Supply constraints in some core markets are forcing occupiers to move into more peripheral space, but generally the preference is for better quality space for operational efficiency reasons.fm
Rents remained stable over the quarter, but are down on year ago levels. The relative lack of prime space is underpinning rental stability in many markets, but there is continued divergence between Southern Europe and countries in the West and North. Rental growth was evident in Russia, Germany and the Nordics.
Investment – Transaction volumes improved quarter on quarter in Q4, and the total for the year was marginally up on 2011. The UK continued to dominate the market in this sector, followed by activity in Germany, France and CEE. The majority of investors sought core assets in cities with stronger economic prospects.
Prime rents were unchanged in the majority of markets in Q4. However, London, Paris and Berlin, three of Europe’s top retail and tourist destinations, all saw significant rental growth, with increases of 15-20% in the year as a whole. This was due to the limited availability of prime space and significant demand from international retailers for the best units. In contrast, vacancy rates are rising in secondary locations and in most of these markets rents are falling.
Consumers are facing the challenges of high unemployment, the threat of further job losses and austerity measures, creating an uncertain economic environment. As a result, confidence levels remain well below long term average levels in most markets. Consumer sentiment did improve slightly in some markets, most notably in Ireland, but the overall EU indicator fell marginally, by 0.1 point, in December 2012.
Retail sales in EU-27 declined over the important Christmas period, in line with retailer expectations, but only in Spain and Portugal were these declines significant. A number of retailer failed across Europe as a result of the tough trading conditions, but there were still winners. Sales grew strongly in Russia, value and luxury retailers performed well and some multichannel retailers reported excellent growth. In 2013, retail sales are forecast to recover slightly, resulting in flat growth for the year.
Offices were the best performing commercial real estate sector in Q4 2012
Across the sectors measured by CBRE, offices recorded a fall of just -0.5% in capital value, with positive performance in France, UK and the Nordics.
European capital values remained broadly stable, registering only a marginal decline of 0.8%. However, this does bring CBRE’s pan-European index to its lowest point since Q3 2009.
France and Germany saw values dip marginally over the quarter, (-0.2% and -0.1% respectively) both resulting in an annual decline of 0.5%.
CEE saw capital values decline by 3.9% and 2.2% in Q4 alone. The office sector, which has a significant development pipeline, weighted this result down, including in Poland (the region’s best performing country) where capital values fell in 2012.
Southern Europe and Ireland saw a decline of 4.0% in Q4 and 12.1% over the year, the result of weak economic sentiment and low levels of investment liquidity.
The significant revaluation of assets in this region, particularly across Spain, Portugal and Ireland, given the scale of the repricing, could come to represent good buying opportunities.
The final quarter of 2012 recorded the highest level of take-up of the year, driven by an upturn in confidence in a number of key Western European markets. However in southern Europe and fringe CEE the markets continued to be characterised by a lack of large deals and high renegotiation rates.
Overall vacancy rates generally remained flat, however this hides significant variations both in terms of the quality and location of available space.
Rental levels followed the same pattern as the first nine months of the year, with prime rental growth restricted to the best performing markets and further declines recorded in some of the southern European economies.
The development cycle reached its cyclical low in 2012 but is forecast to increase sharply in 2013-14 however this is heavily focused in a few key cities. Outside these locations the speculative pipeline remains low, and occupiers requiring prime existing space will have limited options.
Western Europe surprises on the upside in Q4 2012, following particularly strong activity in Germany and Norway.
Interest seems to be returning to secondary assets, as US private equity firms chase a wide range of property types in Germany.
Despite relative underperformance, there are signs of activity in Southern Europe, including some of the first investments on the continent by Latin American investors in Portugal and Spain.
The real estate demands of logistics for online retailing differ from traditional store-based retailing in various ways including labour requirements, proximity to multiple delivery destinations, process capability and integration with parcel delivery networks.
Online retailing creates a need for logistics networks and buildings to accommodate a different and more fluid set of demands. Supply chains may take a variety of forms due to multiple destination points.
Customer demands for a higher quality “delivery experience” are driving change and are a major differentiator for retailers. This raises the need for highly-flexible networks including smaller delivery depots and cross-dock facilities close to major population centres. .
This pivotal point in the relationship between retailing and logistics in Europe will offer significant opportunities to those able to respond to occupiers’ highly dynamic requirements in this fast-maturing sector.
Since 2008 London Has Attracted 41% of Property Investment from outside Europe. This current influx of international capital is qualitatively different from previous foreign investment flows into Central London property.
Sovereign wealth funds and cash-positive pension funds from Asia and the Middle East are becoming increasingly prominent in the market; these investors have particularly long investment horizons
A number of factors are driving SWF and cash-positive pension fund investment activity at present, namely insufficient domestic investment opportunities forcing capital overseas; diversification from domestic economies; and domestic regulatory change giving the potential for sizeable amounts of capital to flow into the real estate market from the pension fund industry.
In uncertain economic periods, investors often tilt their asset allocation and portfolio decisions towards defensive assets that are underpinned by well-secured income.
This paper, co-authored with Mercer, uses actuarial-style techniques to assess the relative standing of the industrial and logistics sector for institutional investors across four key dimensions: income, inflation-related returns, liability-matching and efficient total returns.
Industrial and logistics property performs extremely well on the income dimension, and is likely to be a core element for investors seeking inflation-related returns. The sector also has a role as a complement to bonds for liability-matching purposes, and may offer efficiency advantages to investors prepared to look at sector fundamentals rather than simply adopting index weightings.
European banks seeking to strengthen their balance sheets will not be shedding significant quantities of real estate assets at depressed prices, as they pursue measured deleveraging strategies.
The enclosed report analyses the perception amongst many global investors that banks in Europe will (and can) be forced to achieve deleveraging through the bulk sale of property loans and assets at any price.
In coming to this conclusion, CBRE's report considers: the drivers of banks’ desire to reduce their real estate exposure, the implications of various courses of action, and the actions undertaken by banks since the bottom of the market in 2009.
The escalation of the sovereign debt crisis last year, together with signs that this was starting to spread to the European banking system, led many to believe a new credit crunch was imminent. Tensions in the financial markets appear to have eased since then, but prospects for the sector, banks in particular, remain uncertain, and risks of a new relapse exist.
Clearly, the markets with a stronger concentration of financial services in their occupier base are those likely to be most affected by developments in this sector. London, together with Zurich and Geneva, are the European cities whose economies are most dependent on financial services activity. Dublin, Paris, Frankfurt and Brussels also feature a relatively high concentration of financial services in their local economy.
In terms of office market activity, the contribution of the banking and finance sector to take-up declined in several markets last year, particularly in London. A still challenging business environment and announced lay-off plans will most likely continue to affect the financial sector’s space requirements for the foreseeable future.
The prospects for the major European financial centres, and their office markets, equally depend on ongoing and future regulatory changes. In particular, a failure to implement and enforce new regulation/taxation consistently at multilateral level risks penalising those jurisdictions deemed less attractive.
If the Euro zone crisis continues with no clear resolution:- Prime property generates a higher income return than bonds and equities, with low development activity helping to maintain occupancy rates and continued income generation.
If dealing with the sovereign debt crisis results in inflation:- Continental markets benefit from indexation in the short term and in the longer term real estate is a better hedge against inflation than fixed income bonds.
If the resolution of sovereign debt crisis results in economic recovery:- Occupier demand improves, occupancy rates increase and lack of development results in a shortage of good quality space, increasing income and capital values.
Low interest rate environments are intended by governments as a way of stimulating economic growth by encouraging business investment. However, those same low interest rates have created a significant barrier to banks working out their legacy of non-performing real estate loans.
Created as a hedging instrument, swaps were intended to protect real estate loans with high LTVs, which typically have low interest rate cover, against interest rate rises.
However, as the financial crisis drove interest rates down to unprecedentedly low levels, these instruments have become increasing burdens on investors and, in the case of distressed sales, the recovery of value to lenders.
Compelling data can be the key for engaging the business in designing and implementing an AWS. It serves as a catalyst for dialogue and allows for a deep understanding of the "nuts and bolts" of the business. It also plays a key role in demonstrating the value and benefit of an AWS.
Implementing change is not easy, especially given the diverse range of functions and working practices that are common for organisations in this sector. Executive sponsorship from someone who understands and moreover, believes in the AWS agenda can be crucial to successful adoption of an AWS programme and implemention of change.
The exporting of "success stories" from countries such as the Netherlands and Australia is adding to the momentum of implementation of AWS programmes in the sector. Rapid technological innovation, labour demands and the continued focus on cutting costs will only serve to increase this drive.
Russia and Poland enjoyed a mini boom over the Christmas period, and the UK did better than expected.
Christmas sales disappointed in France and Germany, with Italy and Spain recording more dramatic declines. In general, consumers in the eurozone area spent less over Christmas than those in other countries.
Luxury retailers posted strong sales figures despite a squeeze on spending, as have many value retailers.
Retailer administrations were a feature of the UK market over the Christmas period, but were rare elsewhere.
EMEA Industrial & Logistics MarketView Q4 2012
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