Economic indicators are deteriorating across the region as the Eurozone debt crisis rumbles on. Prospects have become gloomier, mirrored in the latest economic forecasts showing downward revisions for 2012 growth rates in Europe – notably the fringe economies, but also in France and the UK.
The weak economy has been reflected in property markets, where the first half of 2012 has been challenging. Our latest key market indicators (KMI) showed that prime office rents experienced a second successive quarterly contraction in Q2 2012.
However, the rental decline has perhaps not been as severe as one would normally expect during a recession. Our latest data indicate that the European aggregate prime rents fell by just -0.2% over the quarter, whilst levels held up in a number of key markets, including London, Paris and most German cities. There is a clear polarisation between prime and secondary, however, where rental declines had been a lot more negative.
Looking back to our prime forecasts released earlier in May, we had expected a slight decline in rents this year, followed by a return to growth in 2013. Although worse-than-expected economic conditions point to a further downward revision in our next forecast, we still expect the changes to be marginal for prime markets and not to fully reflect the depth of the economies’ troubles.
Perhaps surprisingly, our forecasts for prime unit shops have remained most resilient, despite the fact that retail markets continue to wrestle with weak demand and structural change. Unit shop rents held steady in Q2 in most centres, with notable rises in Paris, Amsterdam and several German cities. But again prime is likely to be unrepresentative of the whole market, and there is clear evidence divergence between prime and secondary performance.
Eurozone prospects continue to be the key determinant to property market recovery. We expect the downside risks to property will remain high as long as the Eurozone crisis continues. The greatest risks are the fringe economies where the concerns about the impact of austerity are most intense and secondary properties across the region. While the prime sector should remain resilient, prospects remain highly polarised and other segments of the markets will continue to struggle.