Commercial real estate cheaper in Europe

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Sovereign wealth funds, institutions and private companies from the Middle East and Asia are getting advantage on the Eurozone crisis

Summer 2012 European Market Indicators quarterly report of Knight Frank which has been recently released shows that the worsening of the slump in the Eurozone has affected prime rents and yields in European commercial real estate  markets negatively. Even though values in the majority of European cities remained stable during the last quarter, rents marked a fall and yields softened in a small number of markets.

The Knight Frank weighted average European prime office rent, the figures taken from the cities covered by the report, repudiated for the first time in over two years, decline by -0.5% in the three months to June. Prime office rents were downgraded in Brussels (-6.8%), Barcelona (-5.9%), Milan (-1.0%) and Dublin (-0.6%).

Prime rents kept their largely stable levels elsewhere, showing that there has been a halt in the rental growth that was marked over the last year in cities such as Paris, Warsaw, Stockholm and Moscow.

Europe 4 While recent rental growth in these markets have been relatively slight, they now seem to have a sufficient reason to come to a pause, as both landlords and tenants decide to “wait and see” how events in the Eurozone will develop.

The weighted average European prime office yield of Knight Frank moved a little outwards in the investment market for the second successive quarter, marking an increase of four basis points to 5.62%. This was caused by a 25 bps softening of yields in both Milan and Madrid.

Prime office yields keep their levels in all other markets. Investment market awareness, however, seems to be declining and a more massive correction of prime office yields may follow in the quarters to come.

The weakening of investor confidence has led to reduced investment rates in the year-to-date, especially in southern Europe.

The senior international research analyst, Matthew Colbourne, said: “The limited rental growth that has been recorded in European office markets over the last twelve months now appears to have almost entirely ended, as businesses cautiously assess the impact of recent developments in the Eurozone. With no quick solution to Europe’s problems in sight, we may be reaching a tipping point when occupier sentiment takes a more decisive turn for the worse and a greater number of markets may see rents start to fall over the rest of the year.”

The head of European investment, Andrew Sim, commented “The current uncertainty in the Eurozone is clearly having an impact on investor confidence and transaction volumes, particularly in secondary markets. However, there remains a strong appetite for prime property in the most stable and liquid cities, coming from super high net worth individuals as well as sovereign wealth funds and institutions from the Middle East and Asia. As a result, prime yields for the best property in Europe are holding firm.”

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