Investment Market Update - Europe Q3 2011

28 Octombrie 2011

DTZ ECHINOX CONSULTING S.R.L.

 

Executive summary

Uncertainty is growing despite good results

European total real estate investment activity reached €25.7bn in Q3 2011, a 3% decrease on Q2 2011. The eighth consecutive increase in the four quarter moving average underscores underlying momentum in the market. But the pace of this increase has reduced significantly reflecting growing concerns over financial markets.

In Europe's largest markets we saw some diverging trends. Whilst France and Germany posted growth over the quarter, the UK saw volumes fall. The CEE markets have once again registered a good performance with volumes of €1.7bn, whilst the Nordics markets came back to its lower but usual level of activity.

Cross border investment rose to €10.5bn reflecting higher levels of both inter and intra-regional activity. Non-European investors increased their exposure most as net investment volumes reached €2.7bn in Q3. Domestic investors remain net sellers (Figure 1).

Private property vehicles are still dominant on the European market, with €13.2bn of acquisitions and positive net investment. The listed sector posted its strongest level of activity in two years in Q3, investing €5.3bn. 

Retail investment exceeded that of offices for the second time this year with volumes of €9.2bn. Competition is strong between investors to acquire the best quality shopping centres. 

We see steady growth in activity, with investment volumes set to reach €121bn in 2012, up 11% on our estimated €109bn for 2011. Activity will be supported by a growing level of sales from the banks as they continue to deleverage their balance sheets.

 

Economic context

European debt crisis uncertainty is growing and banking system is frozen

A large-scale default on Greek government debt now seems unavoidable, and most analysts assume that it will happen at around the end of the year. Having said that, the main question now is to understand how the national economy will be impacted by the risk contagion.

To contain this default risk, Eurozone policy makers and the IMF decided to secure some funds and make them available to recapitalize the Greek banking system as well as some European banks. Despite their efforts, confidence has not come back to the financial system and bond yields increased sharply during the summer. After Greece and Portugal, uncertainty spread to Italian and Spanish markets, with 10 years bonds yields increasing (Figure 2).

As well as showing significant declines over the summer, stock markets also became much more volatile. The FTSE 100, for example, has shown daily swings of 4% and greater since July, compared to swings of up to 2% previously (Figure 3).

Several crucial decisions have been announced to address the debt crisis contagion issues. The European Central Bank (ECB) indicated that it would continue to provide support for banks during the months ahead, and extend the duration of the loans available. We expect the ECB interest rate to fall back to 1% by year end, reversing the rises made earlier in the year. Under a debt crisis scenario of defaults in peripheral economies, ECB rates would most likely stay at a low level of 0.25% over the period 2012-2014.

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