Foreign investors pile into European property market
As the economic slowdown continues across the US, the smart money has been flowing to more lucrative established European shores,' said RICS senior economist, Oliver Gilmartin. 'This trend should continue throughout 2007 although supply constraints in Eastern Europe are encouraging greater risk taking outside the more traditional locations.'
With yields still above borrowing costs in much of the Eurozone, debt backed funds have remained active although an eastward shift in the market has eaten into available supply.
Industrial property has seen the biggest global re-rating amongst investors with the US slowdown impacting less on global exports than previously feared. The easing of the US economy has failed to hold back expansion in tenant demand across emerging markets, resulting in swathes of money continuing to flood into the more speculative regions.
UK business demand picked up across all three sectors, retail, offices and industrial, having been stagnant outside the office sector in the early half of 2006, with a surge in activity in the industrial market. Boosted by improved occupier conditions, investor-optimism perked up with respondents increasingly buoyant on rents and tenant activity for 2007.
Shortages were most acute in the office sector adding further support to rents as the market tightened. Outside the office market, the pace of rental growth strengthened as tenant demand picked up.
Investment demand improved again across all three sectors with the industrial market seeing the sharpest pick up in purchaser activity. Yields declined at a faster pace as capital values climbed higher still. UK financial institutions and cross border investors dominated purchasing activity in the UK market in the second half of 2006.
Domestic real estate companies, however, became notably more active ahead of the introduction of UK real estate investment trusts as portfolios changed hands to enable greater sector specialisation.
Sharper declines in available space have proved pivotal in pushing up rental growth across all key global regions, none more so evident than across developed Asia and especially in re-emerging Japan.
'With the yield spread on secondary properties driven to historic lows across many markets, investors would be first to re-price secondary stock should risk appetite deteriorate. Investors must be careful to discriminate between those markets where weight of money, as opposed to fundamental factors, are driving short term gains,' Gilmartin warned.