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LONDON: Sovereign debt issues are likely to continue to overshadow the fragile and uncertain outlook for the European economy, according to global property consultancy Knight Frank, which hosted its European Property Breakfast on Sept 6. This in turn is having a significant impact on the property sector, notably in respect of occupier and investor confidence, it said.
Knight Frank’s research shows a continuing polarisation in performance across Europe’s property markets. Core Western European markets are seeing strong investor demand and activity, along with the Nordics and Central Europe. However, elsewhere, whilst there remains a degree of investor interest in the more peripheral markets, activity in these countries is down on last year.
So far in 2011, total investment volumes are ahead of 2010, although Q2 saw a moderation in activity in the UK and in Eurozone markets where confidence has been most affected by the recent bond market turbulence. Indeed, investors are focusing increasingly on markets which offer sound underlying economic fundamentals such as Germany and the Nordics. In addition, as a result of the yield compression in core markets over the last two years, an increasing number of investors have been prompted to consider higher-yielding markets in Central Europe, it said.
Chris Bell, managing director of Europe, Knight Frank said: “With the significant degree of polarisation now in evidence across the Continent, it is clearer than ever that Europe is not a homogenous property market and occupiers and investors should seek ‘best-in-class’ advice in order to exploit the potential opportunities resulting from these uncertain times.”
The consultancy believes restrictions on the availability of debt finance will continue to shape the property market for the foreseeable future. "Whilst there is strong competition amongst lenders to provide finance for prime assets, there is little or no appetite to lend on more secondary stock. A small number of mezzanine debt providers are emerging but so far these account for only a very small part of the overall debt market," said Knight Frank.
Occupier markets are expected to remain cautious in the short term, with the best rental growth prospects likely to be driven by either asset management or supply shortages in specific locations. The limited development seen across all sectors in recent years will help to give rise to a supply-led recovery. Aside from obvious economic factors, other considerations such as market size, liquidity and the ease of doing business will continue to drive investment decision-making at a strategic level.
Darren Yates, partner, research, Knight Frank commented: “Given the paucity of prime investment opportunities in major European cities, we see an increasing drive towards development, re-development and refurbishment in core locations in the short to medium term, as against increased demand for more secondary and non-core assets, for which demand remains weak.”
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