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Investors focused on stronger European economies but opportunities exist elsewhere, says CBRE

The European commercial real estate market saw further polarisation in the third quarter of 2012 as investors continue to focus on stronger economies and prime property.

However, the substantial price differential between prime and non-prime property is creating opportunities elsewhere in the region for value-add investors, according to CBRE Group.

Commercial real estate investment in Europe totalled EUR28.3bn in Q3 2012 - this represents a 14 per cent increase on the level recorded in Q2 2012, and almost exactly on a par with turnover in Q3 2011. Investment turnover has shown a strong seasonal effect over the last three years, with the final quarter significantly higher than the rest of the year; CBRE expects this to be repeated in 2012.

Investors continue to follow risk averse strategies favouring stronger economies, non-euro markets and prime property. Analysis of yields shows that pricing has proven robust at the prime end of the market despite the current economic backdrop. This highlights the fierce competition among investors for core assets.

The strongest growth in investment turnover was seen in the UK, which accounted for approximately 42 per cent of investment in Europe during Q3 2012, outshining its recent quarterly average of 35 per cent. France and Germany also posted robust investment totals with investors attracted to the historically stable performance of the investment and occupational markets of key cities. The southern European economies fared less well and in Central and Eastern Europe (CEE), only in the relatively robust economy of Russia has the investment market remained strong.

Market activity in the retail sector continued to fall in Q3 2012, both in absolute terms and as a proportion of the market as a whole. However, prime retail assets, which have been aggressively sought following the economic downturn because of their perceived defensive qualities, have become increasingly scarce and this has reduced investment activity in the retail sector from the elevated levels seen in 2010 and the first half of 2011.

Jonathan Hull, head of EMEA capital markets, CBRE, says: “Capital is mainly concentrated on property that is most bond-like in its characteristics - markets that are liquid and property that has the longest guaranteed income. As a result, the spread between prime and secondary is at an all-time high.
 
“This highly polarised market creates opportunities in the value-added segment of the market. The price differential between prime and anything that is not prime is substantial and therefore the reward for successfully repositioning an asset by active asset management – be that capital expenditure or re-negotiation of leases – is similarly substantial.”

There are currently a number of reasons preventing investors from making a wholesale return to secondary property. Firstly, investor interest is likely to return to secondary property in stages, starting with those located in countries with the strongest economies such as the UK, Germany and the Nordics. There has already been some evidence of this in these markets. For the majority of Europe, however, the latest GDP forecasts indicate negligible growth in 2013 and a slow recovery thereafter. A general pick-up in letting markets is therefore probably some years away.

Graham Barnes, senior director – corporate finance, CBRE, says: “We have seen the re-emergence of interest in more secondary assets in core markets effectively matching the evolution in measures of risk pricing in financial markets. But risk can also be accessed in the most prime assets in more secondary markets. Currently, interest is limited to the more opportunistic of players in the expectation of extreme pricing.”

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