February 10, 2016

Investment surges in Europe for commercial property

Investment surges in Europe for commercial property

The latest RICS Global Commercial Property Monitor shows exceptional investment market conditions in Germany and Spain, where investors’ expect strong returns in both prime and secondary assets over the next 12 months.

Investment activity is improving markedly in several cities within the euro area, particularly in Madrid, Amsterdam and Berlin, where demand from domestic and foreign buyers is on the rise, whilst supply of commercial property is stable, producing upbeat outlook for sector performance over 2016.

Optimism and positive trends across the Euro area clearly contrast with the challenging situation in most emerging markets, where investors’ confidence remained negative during the fourth quarter of 2015, with the exception of India. Sentiment with regards to both, the investment and occupier markets in China, Brazil, Russia and South Africa continue to be negative.

Looking at the future, respondents to the survey are particularly confident of seeing robust capital value growth in Ireland, the UK, New Zealand and Japan during 2016, as strong job creation in these economies is driving occupier demand and this could lead to firm rental growth in the coming months.

Apart from the excellent readings in Germany and Spain, commercial real estate sentiment also continues to pick up in other parts of Europe, in line with their economic trends. This is the case, for example in Ireland, Hungary, Portugal, the Czech Republic, Bulgaria, Romania and The Netherlands, where respondents to the latest RICS monitor are confident in the prospects for both rents and capital values over the year ahead.

Looking at the occupier side of the commercial real estate sector, RICS highlights the improvements registered in Hungary and Ireland during Q4 2015.

In the Netherlands and the Czech Republic, as a consequence of the economic recovery and strong job creation, rents are now expected to rise modestly and provide further support to a strengthening investment market.

In Poland the situation is quite different. The economy continues to follow a consistently solid growth path and this is supporting upbeat sentiment on the investment side of the commercial real estate market. Also strong labour market improvements and firm job creation are driving occupier demand, but the rapid growth in availability means rents are expected to remain under pressure for the time being.

In Switzerland, although capital values are improving, sentiment remains downbeat and rents are expected to decline.

Global trends in cities

Capital value projections are especially positive in Dublin and Frankfurt, followed by Berlin, London and Madrid, where a majority of respondents anticipate prices to increase. By way of contrast, negative capital values are expected in Zurich and Moscow, as well as in Dubai, Singapore and Toronto.

Is Commercial property currently overpriced?

In France, due to the significant gap between strong investments and weak occupier market performance 85 percent of professionals interviewed believe that commercial real estate is overpriced, but also in Japan (80 percent), Germany (71 percent) and Switzerland (71 percent) respondents feel prices are above fair value. However, in Bulgaria, Romania and Italy the highest proportion of respondents consider prices are below or at fair value at present.

When RICS asked respondents on which stage of the property cycle their local market was, perception were quite diverse. In Brazil and Russia, 89 percent and 67 percent of respondents, respectively, believe that the market is stuck in the middle of a downturn. Whilst 46 percent respondents in New Zealand and 42 percent of respondents in Germany felt that market conditions are reaching the top of the cycle.

“Although financial and commodity markets have shown increasing nerves about the global macro picture, the real estate sector across much of Europe remains in good shape with investment flows largely being underpinned by an improving occupier trend. Significantly, the prospect of the ECB taking further measures in March to push inflation somewhat closer to its target will further boost liquidity and continue to drive interest in commercial property,” commented Simon Rubinsohn, RICS Chief Economist.

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