Promising signs emerge, but a distance to go

After a tricky few months for the global economy, more encouraging signs are appearing at last. But with parts of the Eurozone still fragile, it is wise to be cautious about recovery. Moreover, property market developments tend to lag these wider economic trends. So it is perhaps no surprise that Jones Lang LaSalle’s latest prime rental forecasts indicate that the outlook will remain challenging this year, and beyond.

Office forecasts have been revised down significantly over the last 6 months, with 2012 rents now expected to be flat in Western Europe. This contrasts starkly with 4%-plus annual growth rates in 2010-11. Austerity-hit southern Europe will see the weakest conditions, while the Nordics and selected UK centres show most resilience. CEE markets are set to hold up better, with aggregate rental growth comfortably outstripping the west.

Momentum continues into 2013-14, when western offices begin to revive. However, despite stronger demand and tight supply, prospects for pan-European prime office rents remain unspectacular, with annual increases at only 1.8% over the next 5 years. This is not bad by past standards, but it is the sort of slow upturn that may frustrate.

For European retail, rental forecasts have been pushed higher in 2012, though this reflects a few isolated hotspots rather than any underlying improvement. Performance over the next 5 years is similar to offices, with rents rising at an average of 2% a year, against a background of sluggish demand and structural change. Over the longer horizon, rental rankings are dominated by UK and German cities.

The recent turbulence has had a big impact on rental growth prospects in logistics across Europe and a return to growth in 2012 looks unlikely. Some of this year’s loss is reversed later in the forecast, but overall annual rental growth is a modest 1% in the period to 2016. Top centres include consistent performers in Germany, parts of the UK and the Nordics, as well as a few late rebounders in the south and CEE.

Our aggregate forecasts appear disappointing, though this top-level view masks patches of out-performance. Overall, prime markets emerge after the downturn in good shape and experience rental growth over the medium term. The Eurozone economy continues to provide the key. If improvement continues at the same rate as the last quarter, we may be looking at upside potential again when we review our forecasts in the summer.

If you would like more information on Jones Lang LaSalle’s prime forecasts for EMEA markets please contact Andrew Burrell or Shirley Ghan.