Europe’s economic recovery appears to have gained traction in the second quarter, although growth forecasts remain downbeat, a report by Pramerica Real Estate Investors says.

Real estate debt markets are showing signs of life, despite wider pressures on the banking system.

The focus of lending activity continues to be on prime real estate in core, Western European cities, although there are some signs that risk appetite is returning.

Investment activity continues to grow, with retail sector transactions dominating deal flows. However, yields were unmoved in the second quarter, halting the rebound in prime capital values.

Listed market volatility rose in the second quarter, as the wider equity markets reacted to investors’ heightened concerns about sovereign credit risk. Companies with even a small exposure to Southern Europe have been severely punished.

Prospects for real estate occupier markets are beginning to improve and rent levels have stabilised in most markets. However, the path of the recovery remains uncertain, and the synchronised downturn should make way for a greater divergence in performance across markets and sectors, the report says.

Eric Adler, chief executive Europe, says: “Recent news on both the wider economy and real estate markets in Europe has generally been positive. Real estate values have stabilized or risen in most markets and transaction activity is making a steady comeback as lenders begin to re-establish themselves in the market. Despite the recent flurry of better news, the road ahead will undoubtedly remain bumpy. Elevated public debt ratios – particularly in Southern Europe – have sparked growing concern that a sovereign default could usher in a renewed wave of distress in the financial system.
 
“In a real estate context, this is manifested as a fear that the recovery may be getting ahead of itself. Capital values have improved based on falling yields, which are already leaving return targets hard to achieve in the context of a muted rental value recovery. Though a true double dip returning values to their mid 2009 levels remains unlikely, one thing is clear: the coming months will play more to the strengths of fundamental value investors who can purchase the right properties with an eye towards medium term appreciation.”