View the article online at http://citywire.co.uk/money/article/a612056
Eurozone commercial property set for a fall, Bootle warns
Eurozone commercial property will suffer as the eurozone slumps back into recession, warns economist Roger Bootle.
Eurozone commercial property is expected to underperform the rest of Europe through the remainder of the year and into 2013, with economist Roger Bootle warning that capital values will decline in the single currency bloc over the stretch.
With the eurozone expected to slide back into recession, the weak economic underpinning for the region amid the uncertainty around the sovereign debt crisis suggests further falls in capital values, the Capital Economics founder said.
'No positive returns' from eurozone property
‘On average in 2012 and 2013, we still do not expect any eurozone property market to deliver positive total returns,’ Bootle (pictured) said. ‘Capital values have been slower to respond than we had anticipated.
‘Nevertheless, with most eurozone economies now contracting, and the outlook highly uncertain, the conditions seem to be in place for rental values to fall and for yields to rise.’
‘We think that rental values will fall across all three of the main commercial sectors. Unfortunately, recovery prospects for 2014 and beyond seem muted.’
However, within the broad-brush negative picture being painted, there are a few rays of light with the performance of different markets expected to be quite strongly divergent.
Northern Europe fares better
Bootle highlights the core markets of Germany, the Netherlands, Austria and Finland as the most likely to hold up best, while the huge economic contractions in process in the southern states of Spain, Portugal and Greece will predictably see those markets suffer the sharpest losses.
In one sense, the economic indicators are throwing out mixed signals. Historically, eurozone commercial property is attractive on a comparative yield basis with benchmark 10-year bunds. But that metric is clearly distorted, and with many investors expecting bund yields to rise from here, converging with peripheral European sovereign debt, the pressure on property yields is only likely to be upward.
The question is how severe will this be compared with the financial crisis?
‘We do not expect the kind of spikes in property yields that characterised the previous downturn,’ Bootle said. ‘For one thing, property-to-bond yield spreads are between 20% and 30% wider than at the height of the recession.
‘Accordingly, we expect yields to drift, rather than surge over the next 18 months. In the core group of eurozone markets, yields may rise by no more than about 40 basis points (bps) by the end of 2013. Elsewhere, yields may rise by between 50bps and 90bps.’
Investment activity in decline
One factor that could prove supportive to the commercial property market is the lack of new development that has taken place this year. Research from CBRE shows that investment activity in the first quarter was down 12% year-on-year. At a little over €15 billion, that was the lowest level since the third quarter of 2010. Similarly, deal volumes fell by 25%, with the secondary market highly illiquid.
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