Retailers are more selective than ever both in terms of the countries they choose and the type of space they take, with the focus firmly on the best pitches in the major locations. The strength of occupier demand for the best space has resulted in 0.7% increase in CBRE’s EU-27 Prime High Street Rents index in Q1. In contrast, there is very little demand for secondary space, with a few exceptions, most notably for good secondary locations in major German cities. In general, rents in secondary locations continue to decline.
A squeeze on disposable incomes limits retail sales growth
Retail sales recovered slightly in Q1, growing by 0.5%, but there were significant differences by country. Poland, Germany, Sweden and the UK all saw positive growth, but retail sales fell in Greece and Italy and were flat in Spain. Whilst retail sales figures in the PIGS market represented an improvement over the previous quarter, all are expected to show a significant decline in 2013, as disposable incomes remain under pressure.
Confidence remains weak despite some uplifts
Consumer confidence is weak in nearly all markets and remains well below the long term average in Europe as a whole. Nevertheless, sentiment did improve in Q1 in some of Europe’s more fragile economies, including Spain and Portugal. Retailer confidence fell slightly between December and March.
Demand for office space in EMEA was weak in Q1 2013, falling to the lowest quarterly total since 2009, as occupiers focused on lease renewals and renegotiations to cut costs.
The overall vacancy rate remained high, at 10.33% however options for occupiers seeking prime space, in central locations will generally find relatively few options available.
Despite the shortage of high quality space, prime rents in the vast majority of markets remained flat. With difficult market conditions prevailing across most of Europe, it is unlikely a return to rental growth will materialise on a significant scale in 2013.
Aggregate completion levels are set to increase sharply in 2013, and again in 2014. However they will remain well below pre-recession levels, and only concentrated in a few key markets.
2013 is likely to remain a difficult year for office markets and aggregate take-up fell sharply in Q1 to the lowest quarterly level since 2009. This was due to weak demand within the larger sizebands in some of the key western Europe and CEE markets.
The EU-27 vacancy rate was effectively flat in the quarter. The largest increases were seen in CEE, which in some markets was due to the completion of new speculative office schemes, rather than the release of secondhand space by occupiers.
Prime rents remained flat in the majority of markets. Some further small declines in southern European markets were offset by marginal increases in a few of the stronger western European and Nordic markets, leaving the EU-27 Prime Office Rent index unchanged at the end of the quarter.
Office completions will pick up in the remainder of 2013 and again in 2014. Significantly, in some of the key western Europe and CEE markets this will comprise a number of major speculative office schemes, which will add a large volume of new supply to the markets for the first time since the downturn.
Total Q1 2013 investment was up 17% on Q1 2012, with activity mainly concentrated in the usual markets: UK, Germany and France, but signs of life in some of the smaller Western European markets and the CEE region.
Ireland’s last six months’ of total transactions was greater than for the whole of the previous two years. Italy, Spain and Portugal are also seeing stronger than expected investment activity with investors prepared to take on increased market risk.
Continuing competition for prime assets has left yields relatively stable throughout Q1. Southern Europe, in particular, has seen yield stabilisation over recent months with the office sector leading both retail and industrials.
Core investors are increasingly looking at opportunities in the industrial sector, particularly well-let distribution warehouses in the UK, Germany and France.
2013 is expected to be a more active year in terms of lending as banks increase their commercial real estate lending targets and consider lending against more secondary assets.
There is growing recognition among occupiers and distributors of the advantages of cross-dock facilities in modern supply chains and of the emergence of parcel delivery centres (PDC) as a specific category. With growing pressure on margins and delivery speed, these buildings can play a significant role in supply chains by eliminating or reducing inventory holding and handling costs.
The market in Europe is currently relatively immature but expected to expand as the growth in online retailing boosts leasing demand. User demand is dominated by third-party logistics companies (3PLs) but we expect these trends to generate a growing contribution from parcel courier companies.
The relatively small scale of the sector and of individual assets, coupled with low site coverage, has so far constrained the emergence of a sizeable institutional investment market, but the anticipated growth in the user market will increasingly support expansion. Evidence from both Europe and the US indicates rental levels 40-50% above conventional warehouse rents.
Pricing evidence from other more mature markets indicates that early-mover investors will benefit from a yield re-rating as sufficient liquidity emerges to allow portfolio funding and trading, and pricing for this type of asset converges with that for conventional warehouses.
In addition to Irish & international institutional buyers, new UK & German funds, encouraged by improving economic prospects, are showing increased interest in purchasing Irish income-producing assets
The biggest challenge at present is finding an adequate supply of prime properties to satisfy current volumes of demand
The Grade A office vacancy rate in prime Dublin 2/4 CBD is now 6.2%. However, it will be some time yet before speculative development proves feasible
There is a notable disconnect between activity in the retail sector of the Irish economy and the retail property market at present
Several bidders have emerged for good development sites offered for sale over recent months
A number of hotel & pub properties are currently under offer or close to being signed. However, there are not enough good quality hotels being released for sale to capitalise on the current volume of demand from international hotel investors
A marked contrast between the increased volume of transactional activity and improving market conditions in many sectors of the commercial property market in the Republic over recent months and the comparatively depressed conditions in the Northern Ireland property market.