Commercial property markets take an early holiday
4 August 2008

Written by Sophie Baker

Yields in the European commercial property investment market gathered pace in the second quarter of 2008 rising to their highest since 2006, according to Cushman & Wakefield.

The real estate firm found that investment volumes are down 63 per cent on the same period in 2007, and that trading volumes fell to €25.6bn in quarter two, which is their lowest since 2003. Prime yields on average increased to 6.5 per cent, a rise of 16 basis points, placing them at their highest value for two years.

Western yields averaged 5.9 per cent and were up by 53 basis points, equivalent to a capital fall of nine per cent. The outperformance of Eastern markets has continued, although Cushman & Wakefield said this is at a slower pace.

“The market took an early holiday”, said Michael Rhydderch, head of the European cross border capital market group at the firm. “Deal volumes have slowed not so much because of a shortage of demand or supply but because of the sheer uncertainty over financing and hence pricing. This continues to hit larger deals and portfolio sales more than other segments of the market. However, demand is still healthy for prime product and there are more buyers who now see good value emerging in the market.”

In terms of Eastern markets, Russia and Bulgaria have lead the way in terms of growth, compared to the UK which has fallen by 60 per cent, Germany by 55 per cent and France by 51 per cent. However, the most alarming declines have been seen in the smaller markets such as Greece, Ireland, Hungary, Austria and Luxembourg.

The firm has predicted that more distress is likely, but has, however, seen this as a potential trigger for better opportunities to emerge.

“With yields up in most areas, it’s clear we’re heading into a market with much more rational pricing,” commented Rhydderch. “The problem is, some buyers don’t know how to handle their new found power and the choice available to them while many vendors are still not in sufficient discomfort to accept the pricing on offer.”

David Hutchings, head of European research at Cushman & Wakefield, concluded that whilst it is difficult to make forecasts, the firm does anticipate an improvement in market conditions towards the end of the year. “Initially, this change in market conditions will be driven by distress, however, and will be manifest in an improvement in market activity rather than performance.”