Can things only get better? Maybe, but understanding your tenants will be key

Back in the dark days of 2008, it felt at times like we might never see the light at the end of the tunnel. However, selective liquidity has now returned to the market and Europe is leading the world once again in terms of cross-border transactional activity, as equity rich investors have sought to take advantage of attractive pricing to acquire low risk assets in prime locations.

As reported in our recently released European Capital Markets Bulletin, optimism is back on the agenda with the feeling that, at last, things can only get better. Given the activity that we have seen in the market during the early stages of 2011, and the volume of equity pools targeting European markets, we believe that there is the potential for activity to increase by more than 30% this year. If anything, the lack of suitable product rather than a shortage of capital will be an issue.

As perceived safe havens for a number of investors, the major Western European markets will continue to dominate. However, following the steep re-pricing of assets in these markets last year, yields are forecast to stabilise with capital value growth driven primarily by rising rents in 2011. For this reason, it will benefit investors to get to know their tenants and understand what is driving the occupational market. The good news is that tenant activity is increasing, amidst strengthening occupier market fundamentals, which will in turn generate growth. With limited new supply being added to the market, the absorption of stock in under supplied markets will place an upward pressure on Grade A and prime rents. With occupier preference firmly focused on high quality space as tenants seeks higher levels of productivity, however, this growth will be largely confined to core assets, with secondary space likely to see further downward pricing pressure. More information on what is driving the Corporate Real Estate agenda can be found in the results of Jones Lang LaSalle’s recently released Global Corporate Real Estate Survey.

For equity rich investors, opportunities continue to exist in the core markets of London, Paris and Frankfurt where rental growth will remain this year. For those with an appetite to widen their horizons, there will also be opportunities for core assets in a wider tier of cities as the occupational market recovers from a very low historical pricing level, including Lyon, Stockholm, Helsinki, Warsaw and Moscow.