GLIMMERS OF HOPE
IS THE WORST OVER FOR EUROPE?
A
few glimmers of light have been spotted in the European economy over recent weeks – but are they just a flash from the embers of a burnt-out economy or the first signs of a flickering flame that will gather strength through the course of the year? It’s certainly true that the public’s imagination has been caught. A quick look at Google shows a marked increase in stories related to “green shoots” appearing this Spring, along with a corresponding fall in “recession” stories. But a couple of months is a short period in any discipline –and certainly so in economics. Moreover, the evidence for stabilisation, let alone recovery, is at best mixed, and still very thin in some countries in the region. Nonetheless, all recoveries have to start somewhere. To generalise as much as one can across a very varied economic landscape in Europe, the improved news centres on two things: an easing in the rate of decline; and more notably, an improvement in forward-looking indicators – albeit usually from very depressed levels.
David Hutchings European Research Group Cushman & Wakefield LLP 43/45 Portman Square London WIA 3BG www.cushmanwakefield.com
Western Europe, particularly the UK, has seen more positive indicators than Eastern markets, with manufacturing tending to show more improvement than other sectors of the economy. However, there has also been some respite in retail sales, housing and even employment markets in certain countries, along with a modest lift in credit availability and a marked improvement in stock markets, suggesting greater faith in the future course of profits as well as an increased tolerance for risk.
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But do theses early indicators presage a recovery in Europe? In summary, our thoughts are: • • •
• • • • •
• •
•
There is now light at the end of tunnel, but we have a long way to go before we can claim recovery. We have passed the nadir for the economic cycle in most countries, as the global trade slump eases and as policy measures to ward off financial market collapse take effect. Nonetheless, the risk of renewed declines clearly exists in some countries. Moreover, whilst the stabilisation phase may be more rapid than many expect, we anticipate a slow period of growth through to mid 2010. Indeed, with the scale of stimulus and government spending plans, there is a clear argument that we are borrowing growth from the future, thereby subduing the medium-term outlook. For now however, forecasts for 2009 and 2010 look likely to slowly improve after the current quarter. Positive growth may in fact be seen in the third quarter in early recovery markets and by the final quarter or early 2010 in the majority of countries. The recovery will have varying drivers across the region and increased government spending is clearly key in many areas. However, in large part, stabilisation will be led by an end to de-stocking and hence by the manufacturing sector. In turn, the corporate sector may then be the first to see a recovery and drive growth in the initial stages of the cycle. Exports, and hence export-reliant countries, will remain slow in 2010 but competitiveness on the world stage will still be an important factor in who recovers first. The strength of domestic demand will also be important to the recovery, helped by lower interest rates and inflation. However consumer demand generally will be subdued by wage and labour market pressures and by a need to further de-leverage in countries most reliant on consumer debt. Domestic demand growth in the trade surplus, “saver” countries such as Germany will be held back unless there are further measures to encourage spending. Risks to the recovery will clearly remain, including what will happen once the impact of stimulus packages ends and how quickly the authorities start to take corrective action to balance the books and hold back inflation. However deflation remains a clearer short-term risk and with spare capacity building up, fiscal and monetary policy look likely to remain accommodating for some time The polarisation in economic performance between European markets will accelerate in 2010, with the UK, Norway and Poland perhaps set to see an early recovery, followed by Denmark, Finland, the Czech Republic and possibly Sweden.
ALL THAT GLITTERS... Talk of green shoots may be premature. A certain level of scepticism is certainly healthy, given the potential – and danger – of being overly optimistic. However, at the same time, we cannot ignore the evidence that a new phase of the cycle is starting for much of Europe, particularly in the West. For example: •
•
Business sentiment indicators have generally registered steady improvements in recent months and, while they do not yet signal an expansion in demand, they point to a marked easing in the rate of contraction. In most markets this has been led by manufacturing and it is reassuring that indicators for new orders, exports, current activity and even employment are all rising. Indicators for the service sector are also now improving, most notably for future business rather than existing activity. However, service-sector employment
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expectations are still falling in a number of countries. An easing in the rate of unemployment growth is nonetheless predicted in a number of surveys, even if for now, there is little evidence of this in hard numbers. This is unsurprising given that unemployment is a lagging indicator but a high rate of joblessness remains a major threat to the recovery. • Tentative signs of a stabilisation in the housing market have been seen in one or two areas, notably the UK. Finance availability and in some cases affordability, are still a barrier to stronger activity however and further price falls are generally expected, albeit at a slowing pace. • Better than expected consumer performance has been registered in some areas, such as France, Belgium and the UK, often supported by the growing number of car scrapping schemes. • Modestly improving credit liquidity and tightening inter-bank lending margins are signs that the financial markets are stabilising. While there are plenty of problems to work out in the next few years, risks tend to be increasingly specific to particular institutions rather than the entire industry. • While some warn that the recent upturn in stock markets may be a “sucker’s FIGURE 1 | CHANGING ECONOMIC SENTIMENT: rally”, we are still seeing improving confidence PEAK TO TROUGH FALLS AND RECOVERY TO DATE and an increased tolerance of risk, which SI HU SK GR LT LV NL UK DK CZ AT BE LU PT RO IT PL BG ES DE FR FI SE suggests that the actions taken to head of a 0 full-blown depression and prevent a financial market collapse are working. If the stock -10 market recovery is sustained, this will help -20 give the economic recovery more momentum, boosting confidence, personal wealth and -30 making finance more accessible. However, -40 rising bond yields may be a negative factor for the recovery if they bring higher market -50 interest rates and increased government debt -60 burdens. Similarly increased commodity prices are positive if they reflect rising demand, but -70 may instead be a result of financial speculation and increased risk taking. -80
Fall in Sentiment From Peak (%)
•
Peak to Current
Recovery from trough
Figure 1 clearly shows that while all markets have seen a severe fall in confidence, there have been very significant differences in terms of who has been most affected, with Slovenia, Hungary, Slovakia and Greece most impacted, while Sweden, Finland, France and Germany have seen a more modest fall. Also clear is the varying degrees of recovery seen in sentiment in recent weeks. A quarter of these markets has yet to see any improvement in this indicator, while another quarter has seen only a modest change. Nonetheless, half of these European markets have now registered a notable shift in economic sentiment, especially in some smaller countries such as Latvia, Denmark and the Czech Republic, but also in larger economies such as the UK and the Netherlands. Interestingly, Italy has also seen a strong rebound. For France and Germany recovery has barely begun, while Sweden and Austria have yet to see any change at all.
Source: European Commission, Cushman & Wakefield
In Eastern Europe signs of recovery are weaker than in the West, despite modest improvements in some sentiment indicators and stock market performances. Aside from Poland, which is clearly more resilient than most, the heavy reliance of many countries in the region on exports and external finance continues to be a concern, particularly since there are still only limited signs that the collapse in export demand is stabilising, as ECONOMIC PULSE JUNE/JULY 2009
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it appears to be doing in some emerging Asian markets. Deficits are stabilising or being reduced in some areas as imports fall back however and the region’s reliance on Western European demand obviously suggests a delay should be expected in any regard between recovery in the West and in the East. THE SEEDS OF RECOVERY The shape of the economic cycle ahead is starting to take form – at least assuming there is not another Lehman-like event to knock us off course. The downswing has been extreme but is now starting to ease, with the first quarter likely to have been the nadir. The degree of improvement between now and the end of the year may be slight and while the prospect of positive growth in some economies, such as the UK and Norway, may be realised as early as the third quarter, most of Europe will have to wait for the last quarter or the opening part of 2010 for the recession to officially end. An end to corporate de-stocking and a stabilisation in world trade are likely to be key in supporting an end to the recession. This is a more imminent prospect in the UK than in markets such as Germany and France where inventories may need to fall further. While restocking should follow, boosting manufacturing output, this will not drive a return to any degree of “normality” in growth rates. For that we may have to rely on the corporate sector, which in much of Europe appears less stressed than the consumer market in terms of debt levels and has generally reacted faster to cut its cost base to enhance productivity. Of course, confidence and a restoration of affordable credit also remain critical to the recovery. A continued increase in risk tolerance is likewise important to get investment and finance markets working more effectively, particularly to help emerging European markets. Looking across a composite of measures of sentiment (figure 2), the strongest gains to date have been among manufacturers followed by consumers. Denmark, the Czech Republic and Finland have seen the greatest FIGURE 2 | AREAS OF IMPROVING SENTIMENT gains while a number of smaller markets, led by Slovenia, Lithuania Manufacturing confidence Service Sector Sentiment Consumer sentiment and Portugal, have yet to rally. Slovenia Lithuania Portugal Austria Greece Estonia Bulgaria Hungary Germany Sweden France Romania Slovakia Belgium Italy Poland Netherlands UK Spain Latvia Finland Czech Denmark
0% Source: Cushman & Wakefield
50%
100%
150%
200%
% Improvement in key areas of sentiment
250%
300%
The strongest improvements in manufacturing sentiment have been seen in the Czech Republic, Denmark, Latvia and Slovakia, while Belgium, France and Sweden have also seen a notable increase. In the service sector, Denmark and the Czech Republic are again ahead of the pack, but so too are Spain and Germany. Among consumers, Denmark and Finland are well ahead in terms of improving sentiment, followed by the UK and the Netherlands.
Consumer markets may of course lag the recovery in the wider economy, as they suffer from rising unemployment, undermining the benefits accruing from lower interest rates and the price advantages of falling inflation. Moreover, those economies that fall prey to ECONOMIC PULSE JUNE/JULY 2009
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deflation could see consumer demand fall even as the recovery gets underway, as shoppers keep their hands in the pockets awaiting greater bargains and perhaps also fearing a fall in wages and asset prices. Nonetheless, it is still important to note that consumer sentiment is improving. While consumers may take a dim view on the outlook for the economy, they can be more sanguine about the outlook for their own finances – a dichotomy seen in Germany for example. This may simply reflect the fact that the recession has not yet made its presence fully felt, but it is still a reassuring sign of stability and augers well for a steady return to trend growth in 2010. Clearly, the countries best able to generate their own demand or take advantage of a firming in world trade are in the best position for growth. Additionally, those with the largest government stimulus packages may see an earlier return of growth and those with a high resource component will also improve more rapidly as demand for raw materials picks up once more. However, the last two years should have taught us to take nothing for granted and hence the downside risks should be carefully monitored. Aside from the ongoing threat of unemployment and the battle between inflationary and deflationary forces, a key risk must be that the impact of the stimulus plans could start to fade before a sustainable recovery becomes embedded. Moreover, there is clear potential for European governments and central banks to act too early to rein in the liquidity they have injected into the system. Given the increased level of public-sector debt, along with the growing use of “unconventional measures” such as quantitative easing, there will be a need for action once the economy can stand the pain. Acting too early risks derailing the recovery, particularly if it is driven by fear of what for now at least seems at most a quite distant inflation threat. CURRENT FORECASTS Despite the improvement seen in sentiment, forecasts for most European markets continued to decline in May, such that a fall in GDP of 3.7% is now forecast for Western Europe while further East, prospects have fallen below those in the West for the first time since 1998 (with a 3.8% decline forecast).
FIGURE 3 | CHANGING EXPECTATIONS FOR GDP GROWTH
GDP Forecasts at Different Dates:
8 6 4 2 0 -2 -4 -6
West - 09
West - 10
CEE - 09
CEE 10
Forecasts made in:
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Source: European Commission, Cushman & Wakefield
Mar-09
May-09
However, these deteriorating forecasts possibly owe as much to the greater than expected declines seen in first quarter data than to expectations for the next few quarters. Indeed, we now anticipate that forecasts will start to improve in the near future, as, indeed, they are already starting to do in the UK.
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A CUSHMAN & WAKEFIELD RESEARCH REPORT TABLE 1 | MARKET FORECASTS (May 2009)
GDP % pa Austria Belgium Bulgaria Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia Slovakia Spain Sweden Switzerland Turkey UK Ukraine Western Central & Eastern
Inflation % pa
2009
2010
2009
2010
-2.8 -3.0 -2.6 -2.7 -3.0 -10.5 -3.7 -2.5 -5.0 -1.6 -5.6 -7.7 -4.0 -15.0 -11.2 -4.2 -3.5 -1.0 0.0 -3.4 -3.0 -4.6 -2.9 -3.1 -4.0 -2.4 -4.6 -3.8 -10.0 -3.7 -3.8
-0.1 0.1 0.7 1.0 0.4 -1.6 0.1 0.4 0.4 0.1 -0.5 -1.6 0.1 -4.0 -3.2 1.9 -0.1 1.5 1.8 -0.2 0.5 2.3 1.2 -0.5 0.8 0.2 2.5 0.3 0.6 0.2 1.8
0.6 0.6 4.2 1.5 1.2 -0.1 1.0 0.2 0.3 1.3 3.8 -1.0 0.8 3.2 4.2 0.3 1.0 1.5 2.9 0.0 5.7 11.7 2.3 -0.1 -0.4 -0.5 6.5 1.6 17.5 0.6 7.8
1.3 1.4 3.5 2.2 1.6 0.7 1.4 1.1 0.9 2.0 3.6 -0.2 1.6 -0.8 1.9 1.6 1.0 1.6 2.2 1.2 4.6 9.7 2.5 1.5 0.9 0.6 6.4 1.7 11.9 1.3 6.7
Comment With Germany in deep recession, Austrian exports and investment will suffer High export dependence and consumer pessimism hitting growth Weak exports and FDI hitting growth but government/EU spending may help Domestic demand not offsetting falling exports but stimulus package to aid 2010 Falling exports hitting growth but potential for government support for recovery Deepening recession with currency under pressure and public spending to fall Broad based decline in 2009 but relatively good recovery anticipated by 2011 Lower reliance on exports will help but unemployment to subdue consumers Severe industrial decline underway but consumer spending could yet offer relief Relatively resilient o far but structural weaknesses will still undermine growth IMF aid has helped avert a meltdown but a deep slowdown into 2010 expected The scale of the recession and of the potential deflation impact remains severe. Weak external demand and limited scope for the government to offer more aid Government and IMF spending plans will help but not until late in 2010 Budget cuts to further hit demand and banking bailout still muted Strong fiscal position and higher government spending to aid recovery in 2010 Weak external demand feeding into unemployment and hitting domestic demand Strength of fiscal and monetary stimulus plus rising oil price to aid recovery Slowdown under way but outlook still better than most, helped by IMF credit Sharp slowdown in 2009 with 2010 recovery dependant on export demand IMF funding will aid stabilisation but recovery dependant on stronger EU demand Industrial demand down and higher unemployment now hitting the consumer The Euro has aided stability and cut interest rates but competitiveness is down Falling internal and external demand and a need for increased competitiveness Sharper than expected contraction but still potential for earlier recovery Smaller than average downturn and low interest rates may offer some hope Lower interest rates and higher government investment support 2010 outlook Deep contraction continues but policy more advanced and weak Pound will help Severe decline not helped by political tensions but IMF support will help in 2010 Export declines may soon ease but still limited strength in consumer demand Polarising outlook but weaker tone due to banking instability and weak exports
Source: Consensus Economics Inc, Oxford Economics and Cushman & Wakefield
In the short term, more robust performance is expected from Greece, Norway and France in the West and Poland, followed by the Czech Republic, Slovakia and Bulgaria in the East. Growth prospects between countries are however starting to polarise and, moreover, prospects will differ year by year. For example, while France is perhaps the best placed of the larger Euro-zone economies in 2009 thanks to the relative resilience of consumption, its recovery in 2011 may be somewhat weaker than Germany – which after coming in last place in Western Europe this year (excluding Ireland), may have more potential to bounce back once the recovery starts and the Euro becomes more competitive. Italy remains something of a conundrum, with an anaemic recovery forecast as it struggles with falling competitiveness and weaker productivity. At the same time, the government is in a poor position to react to the challenges the country faces. Nonetheless, as has been seen many times before, businesses and consumers carry on regardless. Indeed, Italy has seen a notable improvement in sentiment in recent weeks. Spain likewise has seen an improvement in forward looking indicators but given a fall in competitiveness, increased unemployment and weaker demand, as shown by more widespread falls in prices, the recovery process is likely to be protracted. ECONOMIC PULSE JUNE/JULY 2009
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In contrast, the UK and Nordic markets, led by Norway, are expected to see an earlier and perhaps stronger recovery, to some degree reflecting their earlier fall in the downturn and, other than for Finland, the declines in their currencies. In the East, as noted, Poland is in a stronger position than most in the region by virtue of its scale, debt position and lesser export reliance. The Czech Republic is also a more secure economy but is suffering from its dependence on demand from Western Europe. Russia meanwhile is suffering a severe recession but aided by higher commodity prices and strong government action, a return of growth is forecast for the end of the year. Hungary and the Baltics face a protracted period of correction as deficits are reduced. While outperformance by the East over the West will return relatively quickly, a greater degree of divergence can be expected within the region in the years ahead. INVESTMENT MARKET REACTIONS Improving sentiment and better than hoped for corporate results have delivered a surge in equity pricing in most markets since March, with an average 20% capital growth so far in the second quarter in Western Europe and an even more impressive 37% in Eastern markets. At the same time, property and bond markets have continued to deliver weak performance. Property, East and West, has seen a further quarter of negative growth, with prime values in the West down around 6% and 19% in the East, as an acceleration in rental declines has started to take over from yield increases. Bond markets meanwhile have started to suffer under the weight of future issuances. Quantitative easing and similar measures are helping to hold down medium to long term interest rates, but pricing is still slipping somewhat, with emerging markets most affected. FIGURE 4 | INVESTMENT MARKETS COMPARED - QUARTERLY CAPITAL GROWTH
50 40
Implied Quarterly Growth %
30 20 10 0 -10 -20 -30
The upturn in equity markets is of course a powerful signal and will bring positive benefits in the form of increased personal wealth, as well as making it easier for business to raise equity. It remains a question, however, as to whether this is just a hope-filled bounce or whether it is a sustainable rally. The fact that markets have maintained and indeed improved prices in recent weeks is a positive sign. This will be particularly beneficial for emerging European markets that are in large part reliant on an increased risk tolerance to bring back the investment and funding they need.
-40 Property West
Property CEE
Equities West
Equities CEE
Bonds West
Bonds CEE
Our reading for the wider economy suggests that increasing confidence can be expected to continue to support equity pricing - albeit Quarter 3 Quarter 4 Quarter 1 Quarter 2 (to May) that growth may be more limited until Source: European Commission, Cushman & Wakefield there is clear evidence that income levels can be sustained and grown over time. For bonds, however, recent yield increases could be a worrying barrier to growth, since they will raise the cost of finance for businesses, mortgage holders and, of course, the increasingly indebted public sector. However, rising supply and increased risk tolerance will be partly balanced by Central Bank bond purchasing. ECONOMIC PULSE JUNE/JULY 2009
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Moreover, one reason for rising yields has been an increase in inflation expectations due to higher commodity prices - expectations that could well reverse as the scale of the deflation threat becomes clear. THE IMPACT FOR PROPERTY OCCUPIERS In most sectors and countries, occupiers continue to face an improving market in terms of the opportunities afforded to them and their competitive position when taking new space or renegotiating lease terms. However, for the increasing number looking to release space, the market is becoming tougher. Expectations for rental levels have been cut further during the past few months, along with growth and employment estimates. Office rents for example are now expected to fall around 25% peak to trough, as an average across Europe. However with economic forecasts stabilising and rents adjusting rapidly in some areas, we may soon be half way through this rental adjustment. As a result, the window of opportunity for tenants to enjoy their dominant position may not be as long as typically seen in a downturn. This is particularly the case for prime space, where a significant fall in development will add to the potential for space shortages to emerge in 2011. For secondary space, the balance of power will remain biased towards occupiers for considerably longer and a key consideration for tenants will be deciding on their priorities between a prime location and specification – since near-prime stock that is compromised either by its address or space standards may offer the best opportunity for cost-conscious tenants once prime supply starts to run down. Well-financed occupiers may continue to find the positive yield gap between property and borrowing costs appealing to hold or buy-in real estate, particularly those occupying space on short leases that would find few interested investors. For those needing to raise capital meanwhile, increased investor demand will continue to provide a ready avenue to exploit, although some are finding that the re-awakening of the corporate bond market and fall in corporate bond yields provides a useful alternative. THE IMPACT FOR PROPERTY INVESTORS As in the equity markets, property investors should act in anticipation of economic stabilisation, and, indeed, there are some signs of new investors emerging and existing players getting ready to act. However, with the occupational cycle lagging the economic cycle, there is no perceived need to hurry. Moreover, most investors have not adjusted their risk tolerance as they have in the equity market and remain acutely aware of the occupational downside in many areas of the market. As a result, close attention to a property’s tenancy base is critical and a further increase in yields is generally anticipated, particularly for secondary assets and larger properties where finance is harder to obtain and fewer investors are in the market. Nonetheless, there are some early signs that the pace of yield change will soon moderate and indeed, in certain markets yields are already stabilising, most notably in the UK. Elsewhere, yields are perhaps now more than two thirds of their way through the likely adjustment process, with any more marked adjustment held back by the unwillingness of vendors to accept lower prices and the relative lack of distress seen to date for prime assets.
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A CUSHMAN & WAKEFIELD RESEARCH REPORT TABLE 2 | MARKET VALUES
Rental Growth (yr to Mar 09)
Austria Belgium Bulgaria Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Luxembourg Netherlands Norway Poland Portugal Romania Russia Slovakia Spain Sweden Switzerland Turkey Ukraine UK
Yield levels (Q2 2009)
Retail
Office
Industrial
Trend All Sector
Shoping Centres
Shop Units
Office
Industrial
Yield Trend - All Sector
9.5 -0.3 0.0 -1.7 0.9 -16.1 2.6 0.0 -5.7 -11.1 -16.6 3.6 0.0 3.4 -13.8 0.6 2.4 -31.3 -22.4 0.0 0.7 -2.7 9.2 -14.0 -35.0 -3.4
3.3 0.6 -8.8 3.1 -5.1 1.3 0.0 -1.1 3.0 0.2 -21.4 -0.8 -5.0 0.3 -11.8 -3.0 -4.5 -4.9 -32.9 -5.3 -9.7 -4.6 1.6 -20.7 -42.9 -14.7
0.0 1.5 0.0 -2.7 -5.2 -2.4 2.8 0.0 -7.8 -11.9 -6.5 1.0 n/a -5.2 5.3 25.1 -9.1 1.5 -22.2 -12.7 -4.6 -3.8 -0.9 -15.4 -30.0 -0.3
Î
6.25 5.50 11.00 7.00 5.75 6.25 5.25 5.40 6.70 7.75 7.25 6.50 n/a 6.25 6.50 7.75 6.25 9.25 13.00 7.75 6.50 5.75 5.50 9.00 14.00 7.00
4.70 5.25 8.00 7.00 5.00 6.50 5.00 4.15 5.70 7.50 6.50 5.50 5.50 5.25 6.00 9.50 6.75 9.50 n/a 7.75 5.75 5.75 4.50 8.75 16.00 5.25
5.50 6.25 10.00 7.15 6.00 6.50 5.50 5.10 7.20 7.75 7.00 6.00 6.00 6.75 7.50 7.00 7.50 9.00 13.00 8.00 6.25 5.75 4.75 8.75 15.00 6.00
7.50 7.25 12.00 8.25 7.25 7.75 8.00 6.80 7.90 9.25 8.00 8.50 n/a 7.50 8.50 8.25 8.50 9.50 14.00 8.75 8.00 7.50 6.50 9.25 16.00 7.75
Ò
Ô Ð Ð Ô Ð Ô Ô Ð Ð Ð Ô Ô Ô Ð Ð Ô Ð Ð Ô Ô Ô Ô Ð Ô Ð
Ò Ï Ò Ò Ï Ò Ò Ò Ï Ï Ò Ò Ò Ò Ï Ò Ò Î Ò Ò Ò Î Ò Ï Î
Note: Yields are headline levels for the prime market in each country and are quoted on their local market basis. Those shown in red are calculated net, to include transfer costs of tax and legal fees. Rental growth reflects value movements in a sample of locations across each country. Source: Cushman & Wakefield
Looking forward, the investment market will continue to be vexed by a range of questions: where is investment supply coming from; who will be investing; and when will finance availability increase? New investors are slowly emerging and new monies are being successfully raised in some areas – but the volume of equity available to the market remains well below the levels seen in past years and, moreover, the competition for investor cash is strong. Nonetheless, after a disastrous first quarter, which saw just €11.4 billion invested in commercial property in Europe, (42% down on an already weak final quarter of 2008), levels of activity should increase in the latter part of the year. Financing and re-financing remain a major area of concern meanwhile, with the funding gap looking formidable as loans mature in the next few years and as banks and businesses continue to repair their balance sheets. Many are still waiting for a deluge of foreclosures to kick off, but this is looking increasingly unlikely in most areas in the short term. Most major banks are heavily exposed to real estate and while this limits the degree to which they will increase their lending, it also means it is not in their interest to drive values down further by refusing all refinancing and forcing defaults.
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Many of the worst assets and loans will steadily flow into “bad banks” and asset relief programmes, reducing the losses and the risk profile of the banks remaining loan books. The best assets, meanwhile, will be refinanced although demands for higher margins and equity injections will continue to leave property owners keen to de-leverage and find other sources of finance if they can. Given the ongoing risk to asset prices if we endure any prolonged period of disinflation let alone deflation, investors should remain demanding and risk-aware. It is also likely that the equity participants in property investment, as in the wider economy, may be more demanding in terms of the returns they expect for using their capital. The age of the shareholder may be upon us! _ z _
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Published by © 2009 Cushman & Wakefield LLP all rights reserved. Cushman & Wakefield LLP 43/45 Portman Square London WIA 3BG
A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com For more information about C&W Research, contact: David Hutchings Head of the European Research Group Email: david.hutchings@eur.cushwake.com Tel: +44 20 7152 5029
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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete.