05.10.10
Drop in government bond yields makes real estate with long-term income security even more attractive. The polarised recovery of prime and secondary commercial property markets, which has characterised the European real estate landscape over the last year and a half and has seen investment interest highly concentrated at the prime end, is expected to continue for the foreseeable future, CB Richard Ellis (CBRE) revealed today at its European Investment Market briefing at the annual Expo Real conference in Munich, Germany.
Michael Haddock, Director of EMEA Capital Markets Research, CB Richard Ellis, commented: "There are four aspects of the market that favour prime over secondary property at the moment: on the capital markets side, investment activity is being driven by investors who are mostly institutional in style and lenders who are only interested in lending against prime property; on the occupier side, where there is demand, it is focussed on prime property, but the lack of development activity means that this is also the part of the market where there is the potential for supply shortages."
The fact that the property recovery has been focussed on the prime end of the market is well illustrated by new CBRE analysis of the UK market, based on its widely followed UK Monthly Index. This shows that while prime real estate in the UK has seen capital value gains of more than 25% since June 2009, secondary property has generally seen none. In fact, in some sectors secondary values in the UK have continued to weaken during that period.
After the correction in prices in the European market from June 2009 to June 2010, this summer saw many investors standing back from the market to take stock. It was evident, particularly in markets such as London and Paris where the increase in capital values had been greatest, that the rate of growth had slowed. However, the summer also saw substantial activity in the government bond markets, with the yield on the 10-year German government bond reaching a low of 2.2% at one point. This reflects the market’s view that base rates will remain low for longer than had previously been expected and this will also help to drive up prices for properties with long leases to secure covenants.
One of the results of the differential growth between prime and secondary property is that the yield gap between the two is now at a record high. This is true across Europe and not just in the UK. Counter-cyclical investors will therefore be looking to secondary property to take advantage of the much higher yields currently available. Because secondary property is more exposed to the health of the occupier market, we expect that such investors will initially target countries where the economic recovery is strongest. In Western Europe, therefore, Germany and the Nordics seem most likely to benefit from greater investor interest in secondary property over the coming months.
Jonathan Hull, Head of EMEA Capital Markets, CB Richard Ellis, said: "It was clear that over the summer the rate of yield compression slowed across European real estate as investors took stock of the market. However, with the summer fall in bond yields, the gap between property and bond yields is now back to record levels. As a result, we should see further growth in interest for the most prime property, as well as falling yields in some of Europe’s less liquid markets as they catch up with the movements that we have already seen in London and Paris."
Peter Schreppel, Head of International Investment for CB Richard Ellis in Germany, added: "The encouraging economic growth indicators are attracting international investors to the German real estate market. As a result of this and the general view that Germany remains a stable country to invest in, international investment jumped to 44% of total German activity in the first half of 2010."