29.05.09
Yield shifts have accounted for the majority of capital value declines so far in this downturn due to the re-pricing of risk, but it is rental declines that are expected to become the main driver of capital value falls throughout 2009, according to CB Richard Ellis’ MarketView report on European Capital Markets for the first quarter of 2009. The EU-27 Prime Yield Indices moved out by 30 basis points (bps) on average in Q1 2009, following sharp (40 bps) increases in the last three months of 2008.
The latest CBRE research suggests that prime yields will stabilize in some markets in the coming months due to the scale of re-pricing that has occurred so far and the absolute levels of yields. London, Madrid and Paris are markets which are approaching the next stage in the cycle and thus generating some investor interest, with prime yields having moved out from being some of Europe’s lowest at the top of the market to the current yields close to long-term highs.
The UK market, having been the first market in Europe to face the downturn in the cycle, offers more supporting evidence on this. The latest CB Richard Ellis UK Monthly Index reported rental falls as the main component of capital value decline for the first time in this cycle. Falling rents contributed 1.6% of the 2.8% capital value decline during March 2009.
Michael Haddock, Director of Capital Markets Research for CB Richard Ellis in the EMEA region, commented: "UK investment market activity looks to have reached the floor at around €4 billion in Q1 2009. Following the very rapid yield corrections so far, investor interest is starting to pick-up, certainly towards the prime end of the market and particularly in London. The UK looks set to be the first European market to see recovery in investment activity. However, it is the underlying tenant demand and extent of development pipeline that will shape the pricing in the mid-term." Over the first quarter of 2009 the economic outlook has been continuously downgraded, with a number of indicators declining more markedly than initially expected. All but one EU-27 economies are expected to contract, the exception being Poland where the 2009 GDP forecast is stagnant at 0.1%. Amongst these, the UK is the only market to have started to see a degree of consensus over the next couple of years’ forecasts, whilst uncertainty over economic performance remains high for most of Europe.
Jonathan Hull, Executive Director of EMEA Capital Markets for CB Richard Ellis, commented: "With the number of transactions slowly rising, it is clear that European real estate markets are now moving at different speeds in terms of repricing, influenced more heavily by the state of individual economies. This is creating buying opportunities as investors begin to target specific markets to identify mispricing. The UK has seen the most rapid repricing of any market and we are consequently seeing an increasing amount of equity focused on the UK and on London in particular."
Justin Berry, Head of Capital Markets for CB Richard Ellis in Russia, comments: "Emerging European markets such as Russia have experienced greater volatility and consequently greater peaks and troughs than the more mature markets of Western Europe. However with a strong macro-economic base, Russia will see a swifter recovery than many other European markets. The rouble has now found its natural trading level following a phased devaluation of approximately one third, and has even appreciated by 7% against the US dollar in recent weeks. The country continues to hold the world’s third largest foreign currency reserves, consumer credit remains low, commodity prices have shown gains recently, the stockmarket has risen by 50% in 2009, and generally there is a little more optimism in the market. However there is likely to be a further decline in values until occupational demand shows firm signs of recovery and some liquidity returns to the lending markets."
