Research
Summer/Autumn 2012
European INVESTMENT Commentary
Highlights • The European economic downturn has deepened, with the sovereign debt crisis weighing on confidence and fiscal austerity measures dragging on growth, particularly in heavily indebted countries such as Italy and Spain. Eurozone GDP is forecast to contract by around 0.4% in 2012 and prospects for growth in 2013 have weakened. • Occupier market activity has eased moderately, with European office take-up falling by 4% in H1 2012 compared with the same period of 2011. Prime rental growth has stalled in most European markets, and rents have come under downward pressure in some weak southern European markets. • European commercial property investment volumes fell by around 20% in H1 2012 on a year-on-year basis. Equity-backed investors with a focus on low-risk prime assets have remained active, particularly in London and Paris.
SummER/Autumn 2012
European INVESTMENT Commentary
The economy GDP growth Eurozone GDP fell by 0.2% in Q2 2012, which was the second contraction in three quarters and confirmation that the European economy has entered a period of renewed weakness as fiscal austerity and fragile consumer and business confidence drag on growth. Purchasing Managers’ Index (PMI) data indicates that there is a strong likelihood that a further contraction will be recorded in Q3, which would put the Eurozone back into recession. Growth has moderated even in Germany, which has supported the Eurozone’s overall performance in recent quarters, but grew by just 0.3% in Q2. Among the other large economies, France’s GDP has been flat for three consecutive quarters, while Spain and Italy are stuck firmly in recession, contracting by 0.4% and 0.8%, respectively, in Q2. Growth forecasts for Europe have undergone widespread downward revisions, with current Economist Intelligence Unit (EIU) projections suggesting that the Eurozone will contract by 0.4% in 2012 and that weak growth of around 0.4% will be recorded in 2013, with many countries remaining in recession.
of the Eurozone. In September, Germany’s Federal Constitutional Court cleared the way for the creation of the Eurozone’s permanent rescue fund, the European Stability Mechanism (ESM), while the European Commission laid out proposals for a banking union giving the European Central Bank (ECB) supervisory powers over Eurozone banks. In its boldest attempt yet to resolve the crisis, the ECB announced that it would make unlimited purchases of government bonds from troubled countries. Italian and Spanish government bond yields fell sharply after the announcement of these measures and there is increased optimism that Europe may be taking the right steps towards creating a more sustainable monetary union. However, significant challenges remain ahead, with pressure growing on Spain to request a full bailout and trigger an ECB bond-buying programme, while Greece’s finances remain under close scrutiny.
Inflation
constrained by weak domestic demand, and EIU forecasts suggest that Eurozone inflation will ease to 1.7% in 2013.
Interest rates The ECB reduced its refinancing rate by 25 basis points in July, taking it to 0.75%. It is generally expected that at least one further cut will be made by the year-end in an attempt to stimulate the flagging economy, although the ECB has little room for manoeuvre with rates already at record lows. Elsewhere, the Bank of England base rate has remained at 0.50% since March 2009, while the Swedish Riksbank’s repo rate was cut to 1.25% in September as a result of concerns over low inflation.
Labour market Eurozone unemployment has moved upwards since mid-2011, reaching 11.3% in July 2012, from 10.1% a year earlier. Spanish unemployment has risen to 25.1% and is expected to increase further in 2013. Germany has continued to go against the general trend, with unemployment falling to 5.5%.
The sovereign debt crisis has entered a potentially crucial phase as policymakers make concerted efforts to protect the future
Eurozone inflation stood at 2.6% in August, down from the peak of 3.0% recorded in late 2011, but still well above the ECB’s target of below, but close to, 2.0%. Rising energy prices have been the main component keeping headline inflation above 2.0%, but core inflation, which excludes volatile energy and food prices, has remained relatively low, standing at 1.5% in August. Going forward, inflationary pressures are likely to be
Figure 1
Figure 2
Figure 3
Key interest rates
Eurozone inflation (HICP)
Unemployment
%
% change p.a.
%
6
5
25
5
4
4
3
3
2
2
1
1
0
Sovereign debt
0
2008
2009
2010
2011
European Bank of Swiss Central England National Bank Bank Source: National Banks
2
2012
-1
The number of young people out of work has become a growing concern, with youth unemployment rates at over 50% in Spain and Greece, and above 30% in Italy, Portugal, Ireland and Slovakia.
20 15 10 5
2008
2009
2010
2011
2012
0
2008
Germany
Swedish Riksbank Source: Eurostat
2009 Spain
Source: Eurostat
2010
2011
France
UK
2012 Eurozone
www.knightfrank.com
The growth outlook remains particularly weak in the stressed economies of Southern Europe.
Finland
Norway Sweden
Estonia
Lithuania
Denmark
Belarus Ireland United Kingdom
Netherlands
Poland Germany
Belgium Luxembourg
France
Ukraine Czech Republic
Austria Switzerland
Slovenia
Slovakia
Italy
Portugal
Romania
Croatia
Montenegro
Serbia Bulgaria Kosovo
Albania
Spain
2.0% or higher
Moldova
Hungary
Bosnia
GDP growth forecasts, 2012
Russia
Latvia
Macedonia Turkey Greece
1.0% to 1.9% 0.0% to 0.9%
Cyprus
-1.0% to -0.1% Malta
-1.1% or lower Table 1
European overview EU member status
Country Eurozone
Currency
Interest rate, GDP growth GDP growth Unemployment Inflation September 2012 (%) rate 2012 (%)1 rate 2013 (%)1 (%)2 (%)2
Euro
0.75 ▾
European Union Belgium
Full
Euro
0.75 ▾
-0.4
0.4
11.3 ▴
2.6 ▴
332,839,018
-0.4
0.4
10.4 ▴
2.7 ▴
503,491,975
-0.3
0.5
7.2 ▴
2.6 ▴
11,041,266
France
Full
Euro
0.75 ▾
0.1
0.4
10.3 ▴
2.4 ▴
65,397,912
Germany
Full
Euro
0.75 ▾
0.7
0.6
5.5 ▸
2.2 ▴
81,843,743
Ireland
Full
Euro
0.75 ▾
-0.5
0.5
14.9 ▴
2.6 ▴
4,495,351
Italy
Full
Euro
0.75 ▾
-2.3
-0.3
10.7 ▴
3.3 ▾
60,850,782
Netherlands
Full
Euro
0.75 ▾
-0.7
0.3
5.3 ▴
2.5 ▸
16,730,348
Spain
Full
Euro
0.75 ▾
-2.1
-1.2
25.1 ▴
2.7 ▴
46,196,277
Czech Republic
Full
Czech koruna
0.50 ▾
-1.0
0.6
6.6 ▾
3.4 ▸
10,504,203
Poland
Full
Złoty
4.75 ▴
2.4
2.1
10.0 ▸
3.8 ▾
38,208,618
Sweden
Full
Swedish krona
1.25 ▾
1.6
1.7
7.5 ▾
0.9 ▸
9,482,855
United Kingdom
Full
Pound sterling
0.50 ▸
-0.5
0.5
8.0 ▾
2.6 ▴
62,989,550
Turkey
Candidate
Turkish lira
5.75 ▸
3.2
4.1
8.0 ▾
8.9 ▸
74,724,269
Russia
Non-member
Ruble
8.25 ▴
3.8
3.9
5.4 ▾
5.6 ▴
143,100,000
Switzerland
Non-member
Swiss franc
0.0-0.25 ▸
1.3
1.1
3.6 ▾
-0.5 ▴
7,952,555
Non-member
Hryvnia
7.50 ▸
2.5
3.0
9.1 ▾
0.0 ▴
45,561,989
Ukraine 1
Forecasts
2
Latest available data as at mid September 2012.
Arrows provide a broad indication of recent short-term trends.
Source: Eurostat/Economist Intelligence Unit/National Banks/National Statistics Services/Knight Frank
3
Population
Figure 4
European office vacancy rates % Amsterdam Brussels Dublin Frankfurt Lisbon London Madrid Milan Moscow Munich Paris Prague Warsaw 0
5
10
15
20
25
Q2 2011 Q2 2012
Occupier markets
and may continue to come under moderate downward pressure in these markets.
Occupier activity eased in most European office markets in H1 2012, with Knight Frank’s European office take-up index down by 4% compared with the same period of 2011. Takeup fell in most of the larger office markets, including Paris (down by -16% on H1 2011), central London (-2%) and Frankfurt (-11%). In contrast, leasing activity improved in the major Benelux markets of Brussels and Amsterdam, albeit both cities were rebounding from very weak performances in 2011.
Development activity remains subdued in most European cities, with some exceptions including CEE markets such as Warsaw, where a significant upturn in development activity contributed to rising vacancy rates in H1. With ample amounts of prime space
On a year-on-year basis, take-up was down in many of the major Central and Eastern European (CEE) markets, including Warsaw (-7%) and Prague (-8%), but was nonetheless well above long-term average levels. However, take-up remained at historically low levels in Madrid and Lisbon, with tenants in these markets largely unable or unwilling to make significant decisions about their occupational needs in light of the wider economic uncertainty.
In the retail property sector, the divergence between the performance of prime and secondary markets has continued, partly as a result of retailers streamlining their portfolios by closing unprofitable stores and concentrating their attention on the strongest locations. There remains intense competition among luxury retailers for the limited available space on the very best streets of cities such as London, Paris and Milan, keeping rents in these locations at high levels.
Prime office rents were stable in the majority of European markets during H1. A modest 3% increase in prime rents was recorded in the West End of London but rental growth has paused in markets such as Paris, Frankfurt and Moscow. Rents fell slightly in some southern European cities including Madrid and Milan,
Leasing activity was subdued in many European logistics and industrial markets in H1, but prime logistics rents remained flat in nearly all major locations, supported by limited new supply levels. There remains a complete lack of speculative development in many European markets.
Figure 5
Figure 6
European weighted average prime rental index
European office take-up index
available in Warsaw and Prague, landlords have increasingly needed to offer substantial incentives in order to attract tenants, and the owners of secondary office buildings have found it particularly difficult to lease space.
Index, H1 2004=100
Index, Q1 2004 = 100 140
180
130
160 140
120
120
110
100
100
80
90
60
80
40
High Street Retail
Office
2012
2011
2010
2009
2008
2007
0
2006
60
2005
20 2004
70
H1 H2 2005
H1 H2 2006
H1 H2 2007
H1 H2 2008
Logistics
Based on averages of prime rents in major European markets, weighted by size and market maturity. Source: Knight Frank
4
H1 H2 2004
Based on aggregate take-up in major European office markets. Source: Knight Frank
H1 H2 2009
H1 H2 2010
H1 H2 2011
H1 2012
SummER/Autumn 2012
European INVESTMENT Commentary
Investment markets European investment activity slowed in H1 2012, with commercial property transaction volumes reaching €46.8 billion, around 20% down on the same period of 2011. Declines in investment were fairly widespread, but the Figure 7
Destination of capital, H1 2012 %
countries most affected by recent uncertainties in the Eurozone were among those to see the greatest falls, with investment decreasing sharply in Spain (-79% down on H1 2011), Italy (-63%) and Portugal (-63%). Investment volumes also fell in H1 2012 in Europe’s three largest markets, the UK (-13%), Germany (-40%) and France (-13%). Among the few countries to see improved activity were Other Western Europe Norway (+75%) and Sweden (+32%), with both Other Central/Easternfrom Europe the relatively favourable benefitting economic climate in the Nordic region and Turkey investors’ perceptions of these nations as Finland safe havens outside of the Eurozone. Despite a relatively healthy economic outlook, investment fell in the CEE region, with volumes decreasing moderately in Poland (-21%) and Poland more substantially in the Czech Republic Netherlands (-77%). International investors have continued to take a strong interest in CEE markets, Norway but a lack of available prime product has Russia restricted activity. Belgium Italy
UK
Italy
Germany
Belgium
France
Finland
Sweden
Turkey
Russia
Other Central/ Eastern Europe
Norway
Sweden
Other Western Europe
Netherlands Poland
Source: Knight Frank/Real Capital Analytics
European investment activity has been France increasingly driven by equity-backed overseas investors focussed on low-risk assets in core Germany cities, often purchased for wealth preservation UK purposes. London and Paris have been the key targets for these investors and, as a result, H1 investment volumes held up better in these cities than they did at a national level in the UK and France.
Figure 8
Figure 9
European weighted average prime yields
European commercial investment volumes
%
€ billion
Sovereign wealth funds, pension funds and high-net-worth individuals were highly active in London in H1, with major deals concluded by diverse international investors including Malaysia’s Permodalan Nasional Berhad, the Canada Pension Plan Investment Board and Brazilian businessman Moise Safra. Paris has been a key target for the Qatar Investment Authority, which spent more than €1 billion on office and retail property in the French capital in H1. There have been some signs in recent months that a small number of investors have become more willing to look for opportunities outside of core markets, particularly where pricing is attractive; for example, increased international interest has been noted in Dublin. However, the current focus on prime property in core markets can be expected to continue for as long as uncertainty over the outlook for the Eurozone causes the majority of investors to adopt “safety first” investment strategies. Prime office yields remained flat in most markets during H1, albeit yields drifted outwards in some southern European cities, including Madrid and Milan. Prime yields are expected to remain broadly unchanged across most of Europe in the short-term, but yields for non-core assets may soften.
9 40
8
35
7
30 25
6
20 15
5
10
4
5
Office
Logistics High Street Retail
Based on averages of prime rents in major European markets, weighted by market size and maturity Source: Knight Frank
5
0
2012
2011
2010
2009
2008
2007
2006
2005
2004
3
Q1
Q2 Q3 2008
Q4
Q1
Office
Q2 Q3 2009
Q4 Retail
Source: Knight Frank/Real Capital Analytics
Q1
Q2 Q3 2010
Q4
Industrial
Q1
Q2 Q3 2011 Hotel
Q4
Q1 Q2 2012
RESEARCH
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European Research Matthew Colbourne Senior Analyst, International Research +44 (0) 20 7861 1238 matthew.colbourne@knightfrank.com
European Investments Andrew Sim Head of European Investments +44 (0) 20 7861 1193 andrew.sim@knightfrank.com
Darren Yates Partner, Commercial Research +44 (0) 20 7861 1246 darren.yates@knightfrank.com
European Valuations Nick Powlesland Head of European Valuations +44 (0) 20 7861 1283 nick.powlesland@knightfrank.com
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