Waiting for the upturn?

With the end of the year approaching, it is a good time to reflect not only on what has happened so far, but also on the immediate outlook for European real estate. In particular, there is hope that after a difficult 12 months, we may be close to a turning point.

Recent weeks have brought greater optimism about the economic environment, as well as new fears. The ECB’s new plan for bond purchases and German support for new rescue funds mean that the Eurozone at last has a strategy to ease market speculation. At the same time, the deteriorating situation in Spain is an uncomfortable reminder that the effects of the crisis will not disappear overnight.

Against this uncertain backdrop, it is no surprise that Jones Lang LaSalle’s latest forecasts indicate that the real estate outlook remains soft. Prime office rents are expected to edge down in 2012 – the first year-on-year decline since 2009. The Eurozone sees the most sluggish performance, with rents down most sharply in fringe markets, offsetting good performance in Germany. Outside of the single currency area, rents hold up better, but growth is muted.

Rents revive slowly in prime offices from next year, as economic conditions begin to improve. But despite stronger demand and limited supply for most of the forecast, medium-term prospects are not spectacular, with annual increases below the historic average. Oslo and the central London office markets record the most vigorous expansion over this 5-year period.

Prime retail markets have shown remarkable resilience in 2012, when rental growth is forecast to accelerate to 4.9% – easily the strongest rise in any sector. Although there is a marked loss in momentum from 2013, the sector sees continued rental growth over and is most vigorous over the forecast period. Hotspots for unit shops include selected German cities, London, Moscow and Paris.

There have been further revisions to our logistics forecasts and pan-European rents are predicted to decline by almost 1 per cent this year. This loss is reversed thereafter, but annual growth is under 1% over the 5-year period. Top logistics centres tend to be located in the north, with Germany and the Nordics most consistent, but there is also a belated upswing in the southern fringe economies.

Despite strains within European bond markets, property yields have remained steady. This stability is set to continue, as investors focus on prime assets in core markets. European prime yields hold at 6% over the longer term, even as market interest rates climb, implying a narrowing risk premium.

The latest view suggests there is more cause for optimism about the real estate recovery than three months ago, but also that it remains too early to call the bottom of the current downturn.