Austerity measures across Europe polarise the property investment market
DTZ ECHINOX - 14 September 2011
New research released today by global real estate services firm DTZ measuring the impact of austerity measures on European office markets has identified a limited investor appetite for risk.
The report reveals that pricing has driven returns in the most exposed markets to around 25% higher than in the least exposed markets.
The report, 'Impact of Europe's austerity measures' categorises European countries using three criteria: national debt as a proportion of GDP, GDP growth and the percentage of public sector job cuts (as a proportion of total office employment). Greece, Ireland, Italy and Portugal are categorised as the 'most exposed' by matching two or more of the criteria. Five countries including Germany and the UK, match one criteria and are classified as 'marginally exposed'. Those matching none of the criteria are classed as 'least exposed' and are dominated by economies outside the Euro including the Nordics and CEE nations. Most exposed markets were found to have annualised total returns of 8.4% pa, marginally exposed 7.8% pa and the least exposed 6.7% pa.
The difference in performance between the three categories is driven primarily by yield spreads. The most exposed markets are currently offering yields around 100 base points above those of the least exposed markets. Along with higher yields, the report predicts some yield compression, as the most exposed markets' government bond yields are forecast to tighten and return towards their lower long-term averages. This is in contrast to the least affected markets where government bond yields are expected to rise, triggering negative yield impact.
Although total returns are higher in the most exposed markets, rental growth remains subdued. Forecast job cuts are acting as a drag on office markets as the effects of austerity measures impact directly on public sector employment numbers and indirectly on private sector growth.
Matthew Hall, Associate Director of DTZ Forecasting & Strategy Research and author of the report, comments: 'The four countries highlighted as most exposed to austerity measures are Greece, Ireland, Italy and Portugal. However, it is notable that most countries, a total of 17, remain largely directly unaffected by the crisis. The Nordics and countries within the CEE remain best placed to deal with the crisis as most have kept a tight grip on government finances and not being part of the Euro allowed them to more effectively use monetary policy when dealing with the early stages of the crisis.'
Although the report is based on national level criteria, varying levels of exposure within each country are highlighted. Second tier regions and cities are generally the most exposed through high proportions of public sector employment. Some regions, particularly in the CEE and peripheral markets, are dominated by public administration, with up to 70% of the office workforce employed by the government. Generally, a high proportion of public administration in a workforce is also related to low Financial and Business Services sector employment, so most major CBD markets find themselves in a relatively strong position in terms of dealing with public sector job cuts.
Tony McGough, Global Head of DTZ Forecasting & Strategy Research, comments: 'The impact of austerity measures on property investment markets across Europe has been one of polarisation. Property yields have remained high in peripheral economies, whilst driving them down in core locations. Capital has shifted rapidly from countries most identified at risk, and even to less exposed cities within countries. However, the impact of occupier markets distress on rents is still playing out. Austerity cuts throughout Europe have been announced but few have actually taken place so the full impact will be revealed over the course of the next couple of years.'
Bogdan Sergentu (photo), Head of Valuations and Consulting at DTZ Echinox commented: 'As economic expansion generally leads to higher employment levels and demand for office spaces, Romania, with one of the highest forecasted GDP growth in Europe for 2012, could expect a development of this real estate market sector in the next period.
However, considering the elevated risk of contagion and the economic relations between the four countries highlighted as most exposed to austerity measures (namely Greece, Ireland, Italy and Portugal) and Romania, any relevant outcome is difficult to predict and has a high degree of uncertainty.'
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DTZ is a global real estate services firm with offices in 140 cities and 42 countries (across Europe, Middle East and Africa, Asia Pacific and the Americas). The firm provides advice and on-the-ground delivery to investors, developers, corporate and public sector occupiers and financial intermediaries. DTZ works with clients across the breadth of their real estate needs, spanning all real estate sectors and encompassing Investment Agency, Leasing Agency and Brokerage, Property Management, Project Management and Building Consultancy, Valuation, Investment and Asset Management, Consulting, and Research. The parent company, DTZ Holdings plc, has been listed on the London Stock Exchange since 1987.
In November 2002, after 9 years of successful operations on the Romanian real estate market, Echinox Consulting entered a partnership agreement with the multinational company DTZ, one of the leading global real estate services companies. Therefore Echinox Consulting became the local DTZ representative office, operating under the trade name of DTZ Echinox.
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