Muted outlook for European property after weak Q2 – Aberdeen

The fragmentation of European real estate financing markets has deepened further, according to a sector report from Aberdeen Asset Management.

In most core European countries, conditions for funding for property promising secure, long-term income are almost unchanged. At the same time, funding for non-core property or any real estate in southern Europe is becoming more difficult.

The sector as a whole has turned in weak performance over Q2. Take-up weakened again, although vacancy rates have been more stable for prime locations, aided by minimal new completion levels, and have even fallen in some German markets.

Vacancy rates have continued to rise from already high levels for secondary accommodation. Secondary rents continue to fall and secondary yields to rise across most markets with the exception of Germany.

Prime rents and yields have been mostly stable, other than in southern Europe where both occupier and investor markets continue to deteriorate.

Aberdeen’s long-term leading indicator highlights that over the next five years.
the retail and industrial sectors appear to be marginally underpriced and projected to outperform the office sector, which appears to be marginally overpriced.

France, Germany and the Nordics are forecast to outperform, particularly in the short term. Some Nordic office markets are, however, starting to look expensive.

The short-term leading indicator implies that capital values are projected to dip again in most European markets over the next year, particularly for secondary property and in southern Europe.

John Danes, Director, Property Research at Aberdeen said portfolios should be biased towards core, lower risk investments, with secondary values expected to fall further over the next 12 months.

There are likely to be further distressed opportunities a year from now, with significantly lower capital values in neglected markets such as Spain and Ireland. Aberdeen has recently produced analysis on both markets.

The full report includes five-year city level forecasts of rents, yields and total returns and an assessment of individual cities’ pricing against long-term fundamental value.

Danes noted that doubts surrounding the future of the euro are having a serious effect on business and consumer confidence, resulting in a vicious circle of deteriorating confidence and growth, compounded by tax rises and public spending cuts.

The recently announced Spanish banking bailout may act as a short term fix, but the fundamental causes of the Eurozone crisis remain unresolved. The outlook remains polarised, with Germany likely to enjoy better growth while southern European nations are forecast to face a deep recession.

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