European INVESTMENT Commentary Summer 2013
European INVESTMENT Commentary
The economy GDP growth Eurozone GDP declined for the sixth successive quarter in Q1 2013, falling by -0.2%. Peripheral economies continued to struggle, with Spain and Italy both contracting by -0.5% in Q1. However, previously resilient core economies have also been weak in recent quarters. Germany only narrowly avoided a recession in Q1, growing by just +0.1%. France entered a double-dip recession, contracting by -0.2% for the second consecutive quarter. Nonetheless, the Eurozone’s performance in Q1 was an improvement on the sharp fall in GDP of -0.6% in Q4 2012, and there are strong signs that the rate of economic decline is easing. Purchasing Managers’ Index (PMI) surveys have indicated that, while the Eurozone recession almost certainly extended into Q2, the region is now stabilising and a return to growth may be seen by the end of the year. However, full-year GDP forecasts for 2013 remain negative, with the Economist Intelligence Unit expecting a contraction of -0.7%. In light of the uncertain outlook, the European Commission signalled a partial retreat from austerity in May, allowing six countries including France and Spain additional time to reach their deficit targets. A continued shift in emphasis towards more growth-orientated economic policies is expected over the coming months.
While the real economy has struggled, tensions in financial markets have eased considerably since late 2012, with the creation of the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) programme contributing to improved confidence. Spanish and Italian 10-year government bond yields have fallen from their crisis highs of above 7% to much more sustainable levels.
The ECB reduced its main refinancing rate by 25 basis points in May, to 0.50%, in an attempt to support the flagging economy. While the cut is generally expected to provide only a minimal boost to growth, the current backdrop of low inflation may provide the ECB with room to make further cuts in the coming months. The ECB has also left open the possibility of implementing negative interest rates or other unconventional measures in order to encourage bank lending.
The €10 billion bailout for Cyprus, agreed in March, resulted in minimal contagion to other Eurozone countries, and it has become less likely that one of the Eurozone’s larger economies will require a rescue plan during 2013. However, financial markets remain highly sensitive to political events. The sharp spike in Portuguese bond yields in early July, following fears of a break-up of its coalition government, served as a warning that the crisis in the Eurozone has not completely receded.
Inflation Eurozone inflation has been on a general downward trend over the first half of 2013, largely as a result of falling global energy prices. It stood at 1.4% in May, well below the ECB’s target ceiling of 2.0%. Inflationary pressures from domestic factors, such as consumer spending and wages, are expected to remain subdued over the rest of 2013. As a result, Eurozone inflation is forecast to stay relatively low throughout the year.
Labour market Unemployment in the Eurozone has continued to rise, reaching a record 12.2% in May, with youth unemployment at a troubling 23.9%. There has been no let-up in the rise in Spanish unemployment, which stood at 26.9%, while joblessness in France is a growing concern, rising to 10.9% in May.
Retail sales Retail sales in the Eurozone were down by 1.1% in April, on a year-on-year basis, with consumers remaining cautious in light of the weak economic outlook and rising unemployment. The European Commission’s Consumer Confidence Indicator has remained firmly in negative territory, but it has recorded a gradual improvement in household sentiment since late 2012.
10-year government bond yields
Eurozone inflation (HICP)
% change p.a.
1 2012 UK
Spain Source: Eurostat
2012 2013 UK
Ten of the seventeen Eurozone countries are forecast to record GDP contractions in 2013.
Belarus Ireland United Kingdom
Ukraine Czech Republic
2.0% or higher
GDP growth forecasts, 2013
Serbia Bulgaria Kosovo
Macedonia Turkey Greece
1.0% to 1.9% 0.0% to 0.9%
-1.0% to -0.1% -1.1% or lower
European overview EU member status
Interest rate, June 2013 (%) 0.50 ▾
GDP growth GDP growth Unemployment Inflation rate 2013 (%)1 rate 2014 (%)1 (%)2 (%)2 -0.7
Latest available data as at late June 2013.
Arrows provide a broad indication of recent short-term trends.
Source: Eurostat/Economist Intelligence Unit/National Banks/National Statistics Services/Knight Frank
European prime office rents
largest occupier deals ever seen in Spain.
A relatively subdued start to 2013 was recorded in most European office markets. Take-up fell in many major cities in Q1, as the continuation of the Eurozone recession created renewed caution among occupiers.
€ per sq m per year London (West End) Moscow Paris
The weakening French economic outlook contributed to a sharp slowing of leasing activity in Paris in Q1, with take-up in the Île de France region amounting to 393,500 sq m. This was 24% down on the Q1 2012 and the lowest figure since Q3 2009. There were very few large-scale transactions, as companies hesitated before making major occupational decisions. Despite the weak demand, vacancy rates remain low across much of the Paris region, particularly in central areas.
London (City) Stockholm Milan Frankfurt Munich Amsterdam Dublin
Central London office take-up in Q1 amounted to a seemingly respectable 239,000 sq m, 18% up on Q1 2012. However, this was boosted by one very large deal, without which Q1 would have been the weakest quarter since Q2 2009, as Google acquired more than 74,000 sq m for its new UK headquarters at King's Cross Central.
Madrid Warsaw Brussels Berlin Prague Budapest
10-year low 10-year high
Source: Knight Frank
Office take-up was down in most of the major German markets in Q1, although vacancy rates generally continued to fall as a result of limited development completions. In contrast, a significant improvement in take-up was observed in Madrid, boosted by Vodafone’s leasing of 50,000 sq m at the Avenida de América 115 business park, in one of the
Further east, demand for office space in Warsaw and Moscow has remained steady, but both markets saw vacancy rates increase in Q1. Availability in these cities is expected to continue rising, as both have large amounts of space in the pipeline for the next two years. European prime office rents have remained largely unchanged in recent quarters, with rents plateauing in most core markets. Paris is a noteworthy exception, having seen a modest fall in rents in Q4 2012. Across the peripheral markets hardest hit by the sovereign debt crisis, rents are now coming under only moderate downward pressure. Prime rents may have bottomed out in Madrid, and there are signs of rental growth in Dublin. European retail markets remain affected by weak consumer confidence and slowing retail sales. This has created challenging market conditions, particularly in secondary locations. However, demand for retail space has generally remained healthy in prime locations, supporting rental growth over the last year in some of the best high streets and shopping centres in cities such as Paris and London. Speculative development remains scarce in the industrial and logistics sector, limiting the availability of large spaces in many major markets. As a result, built-to-suit development activity has increased in some locations in markets such as the UK, Germany and Poland. Figure 6
Eurozone GDP growth vs European prime office rental growth % GDP growth (q/q-4)
European office vacancy rate index % rental growth (y/y)
Index, Q1 2005=100 20
80 60 40
Eurozone GDP growth 1
European prime office rental growth1
Based on a weighted average of rents in 15 key European office markets.
Source: Knight Frank/Eurostat
-20 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 2005 2006 2007 2008 2009 2010 2011 2012 2013
Based on a weighted average of vacancy rates in major European markets. Source: Knight Frank
European INVESTMENT Commentary
Investment markets The European commercial property investment market made a solid start to 2013, with €27.7 billion transacted in Q1, according to Real Capital Analytics/Knight Frank data. Compared with the same quarter of 2012, investment volumes were up by a modest 5%. This followed a surge of activity in Q4 2012 when €38.7 billion was invested, bringing the total for the year as a whole to €116.4 billion. Continuing the trend of recent years, prime assets in core markets have remained the main focus of investor demand. However, interest in peripheral countries and secondary cities has steadily improved, as concerns over the sovereign debt crisis ease, encouraging investors to adopt slightly less cautious investment strategies in the search for higher yields. The core western European markets of the UK, Germany and France collectively accounted for 64% of total transaction volumes in Q1 2013. Compared with Q1 2012, activity was up significantly in Germany (+68%), boosted by several large portfolio deals including Dundee International REIT’s purchase of an 11-building office portfolio for €420 million and IVG’s acquisition of three office and retail properties in Frankfurt and Berlin, for a price believed to be close to €500 million.
On a year-on-year basis, Q1 investment volumes improved slightly in the UK (+4%) but were down in France (-30%). Demand for prime city centre assets in London and Paris has remained strong, with both cities continuing to attract international investors. However, transactional activity has been restricted by the limited availability of stock. Investors from Asia and the Middle East have broadened their interest in European markets, having been responsible for significant capital inflows into London and Paris in recent years. Other western European capital cities and strong regional markets are now on the radar of these investors. This is demonstrated by the sale of the landmark BelAir project in Brussels to a joint venture involving an undisclosed Asian institutional investor; and the Chinese sovereign wealth fund Gingko Tree Investment’s acquisition of a stake in the Coop headquarters in Manchester. Investment activity in the CEE region and eastern Europe has been fairly subdued in recent quarters, although transaction volumes in Russia have risen significantly, boosted by some exceptionally large deals in Moscow. Most notably, Morgan Stanley purchased the Metropolis shopping centre, for a reported US$1.2 billion (c.€900 million) and O1 Properties acquired the White Square office complex for US$1.0 billion (c.€750 million).
European weighted average prime yields
European commercial investment volumes
Investment volumes remain relatively low in the markets most affected by the sovereign debt crisis, but investor demand is reviving in some of these countries, most notably Ireland and Spain. Over €300 million was invested in Ireland in Q1 2013, which was the highest quarterly volume since Q4 2007. In Spain, opportunistic investors and Latin American buyers have been increasingly active, while there are also encouraging signs that other institutional investors, such as German funds, are returning to the market after being largely absent in recent years. Prime yields have remained unchanged in the vast majority of European markets in the first half of 2013, although the recent strength of demand in Dublin has caused yields to harden in the Irish capital. Yields are expected to remain broadly stable over the rest of 2013 across most of Europe, supported by robust demand and a general shortage of available prime stock.
Investors are gradually moving up the risk curve in the search for higher yields.
Logistics High Street Retail
Based on averages of prime yields in major European markets, weighted by size and market maturity. Source: Knight Frank
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008 2009 2010 2011 2012 2013
UK Germany France Nordics Central/ Benelux Rest of Eastern Europe Europe Source: Knight Frank/Real Capital Analytics
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