Big real estate transactions have risen in romania 18% in quarter 2
CUSHMAN & WAKEFIELD - 11 August 2008
An early holiday for European commercial property markets?
- Trading volumes in Europe fall to €25.6bn in quarter two, their lowest since 2003
- Out-performance of Eastern markets continues – but at a slower pace. The volume of the transactions have risen in average with 6,5% (Q2 2008 versus Q2 2007)
- In Romania the total volume of big commercial transactions has reached 696 million Euro, rising 18% compared to the same period in 2007, a lot over the regional average
- Prime yields in Europe on average increase 16bp to stand at 6.5%, their highest for two years
- In Romania yields have risen approx. with 0,25 – 0,5% for prime properties
- Occupier markets in Europe remain firm but rental growth is easing
- More distress likely – but this could be the trigger for better opportunities to emerge
- After a weak third quarter, an upturn in investment turnover is likely by the year end
The correction in the European commercial property investment market gathered pace in the second quarter, with yields increasing to their highest since 2006 and investment volumes down 63% on the same period in 2007, according to new research by Cushman & Wakefield.
“The market took an early holiday” said Michael Rhydderch, head of the European cross border capital market group at Cushman & Wakefield. “Deal volumes have slowed not so much because of a shortage of demand or supply but because of the sheer uncertainty over financing and hence pricing. This continues to hit larger deals and portfolio sales more than other segments of the market. However, demand is still healthy for prime product and there are more buyers who now see good value emerging in the market.”
In Romania the second quarter registered a coming back of major real estate deals on the real estate market: the volume of transactions reached 696 million Euro, 18,6% more than in the same period of 2007 and almost 6 times more than in the first quarter of the year (119 million Euro). This makes the total amount of investments in the first semester for Romania to reach 815 million Euro. Our country has good results in this respect, comparing to the region countries: Hungary only registered 15 million Euro investments in the second quarter and a total of 135 million Euro in the first semester, Czech Republic has 141 million Euro in Q2 and 235 million Euro in S1, Bulgaria has 251 million Euro in Q2 and a total of 746 million Euro in S1 while Poland, although has a total of 907 million Euro in S1 ( 703 million Euro in Q1 and 204 million Euro in Q2), in fact registered much lower volumes than last year: the Q2 value is 77,8% lower than the one for the same period of 2007.
Costel Florea, Head of Capital Markets, Cushman & Wakefield Activ Consulting has commented: “ The important transactions finalised in the first six months of this year have been started since last year. The main reasons for which the investment funds are more cautious in making acquisitions are:
- the existence of offers at similar prices, even lower, on more mature markets and more transparent, such as Great Britain or Germany (there are offers for office buildings in The City – London – at 7% yields)
- the rising number of announced projects (specially in retail) which leads to the conclusion that in the next 2-3 years we can assist to a fall in rents and therefore a fall in the value of acquired properties
- the rise of costs in financing and in the percentage of the private equity which has lead to a smaller rate of internal rate of recovery (IRR), the main indicator of analyses of the output for the investors
Because of the above reasons, it is possible that the prices for commercial properties to stay further at a lower level compared to last year, and the investors to be interested mostly in partnerships with developers who need capital infusions, the outputs being higher in developments.
In the present in Romania we can discuss about yields at 6,25% - 6,5% for prime office, at 7-7,5% for secondary office, and the retail reaches 6,25 -6,5% for prime properties in Bucharest and 7,25-7,5% outside Bucharest. Therefore the yields have risen approx. 0,25 -0,5% for prime properties in Bucharest, while the rise of the yields outside Bucharest reaches 0,5-1% (50 to 100 base points).”
The west has seen a fall of over 50% in trading this year versus the quarterly average for 2007 but eastern markets are up slightly due to growth in Russia and Bulgaria. The larger markets are clearly suffering, with the UK down 60%, Germany 55% and France 51%, but the worst declines have been in smaller markets such as Greece, Ireland, Hungary, Austria and Luxembourg. Belgium and the Netherlands have held up well while falls in the Nordics (-41%) and Southern Europe (-43%) have been less than the average. For the Nordics this is due to the resilience of Denmark and Finland, while in the south, Spain is holding up the average, with deal volumes down less than 10% on last year. Arguably the re-pricing under way in Spain (behind only the UK and Norway in its severity) and the more immediate signs of distress are opening up opportunities at a faster rate.
Occupational markets meanwhile remain more robust, with prime rents up 8.9% in the year to June, but the rate of growth is slowing, with an increase of 4.6% pa in the second quarter. Western markets have borne the brunt of the slowdown, with growth of 2.3% pa in the 2nd quarter compared to 16.8% pa in the east and 11.2% pa in Central Europe. After a strong recent run, retail slowed to a similar pace to offices in the second quarter, but remains ahead over the year as a whole at 10.9%, versus 9.9% for offices and 2.6% for industrial.
On average, European prime yields rose 17bp in the second quarter, taking their increase since last June to 39bp Yields in the west are up 53bp, compared to a 20bp increase for central Europe and a 57bp fall for eastern markets. Industrial and office yields are out around 50bp compared to a 25bp rise for shop units.
“With yields up in most areas, it’s clear we’re heading into a market with much more rational pricing” said Rhydderch. “The problem is, some buyers don’t know how to handle their new found power and the choice available to them while many vendors are still not in sufficient discomfort to accept the pricing on offer.”
International buyers remain the more cautious, with cross-border investment falling 55% this year versus a 44% fall in domestic spending. “This may not continue given the weight of international capital waiting on the sidelines”, said Rhydderch. “The picture is mixed at present, with demand coming from local as well as international players in most markets. By far the most active players overall are the German open ended funds. The sovereign wealth funds are also still there in some number, but are proving selective about the opportunities they will pursue. In nearly all cases prime property is the order of the day.”
At the same time, new funds continue to emerge. However, that does not mean they are ready to invest according to Rhydderch. "We are seeing more new fund announcements but few have actually closed. The majority who have successfully raised money are targeting the opportunistic spectrum of the market. Most believe that pricing is still adjusting and more distress will be seen in the months ahead and are therefore focusing on investment towards the end of the year or in 2009. There is no strong geographical focus as to where they are looking – with the position of the vendor a stronger determinant of what makes a good opportunity. Activity is therefore focusing on those situations where vendors have a time-defined need to sell."
“Prime yields may look increasingly attractive but investors must factor in a weaker rental growth outlook” said David Hutchings, head of European research at Cushman & Wakefield.
“We are forecasting prime rental growth of 3-4% in 2008 but just 1-2% next. At the beginning of the year, growth of around 4% pa had been expected for 2009. Nonetheless, with inflation expected to peak in most markets in the third quarter and, at least in the west, this opening the way for a fall in interest rates, yields for prime space should start to stabilise in the final quarter, probably some 25-35bp higher than reported figures as at the end of June. This however is not too far from where off-market deals are already taking place and it is secondary stock which is most vulnerable to a more sustained increase – particularly as occupier markets weaken.”
"Whilst no one can know for sure of course, we do anticipate an improvement in market conditions towards the end of the year despite the risks facing the occupational market and the limited appetite of the finance markets” added Hutchings. “Initially, this change in market conditions will be driven by distress, however, and will be manifest in an improvement in market activity rather than performance."
“With interest rates now more stable, the risks going forward are spreading from finance to the economy but this may actually be the catalyst the market needs to generate more acceptance of pricing and more willing vendors. To a degree therefore, this will be a healthy sign of a correcting market” concluded Rhydderch. “More well-priced opportunities should therefore emerge after the summer and as a result, while the current quarter will be weak, the final quarter could produce better results and we anticipate trading for the year to total €150-155bn. Indeed, those investors waiting until the year end before re-entering the market may well find a more competitive landscape than they had anticipated.”
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