Positive Signs in U.K. Hint at Stabilization of European CRE Market

With the global recession still in full swing, recovery is far off for even the best of the world’s commercial real estate markets, but , according to international property advisor DTZ’s new European Quarterly report, certain first quarter results in the United Kingdom indicate that the market in Europe may very well be on the road to stabilization. Sometimes, no news is good news, and in the case of transaction volumes in the U.K., there was nothing new to report in the first quarter; things didn’t get better, but they didn’t get worse either. At £3.5 billion, transaction volumes held steady from the fourth quarter of 2008. Another factor that points to possible forward movement on the road to recovery is the apparent stabilization in yields on prime assets in some areas, particularly in the Central London market. Conditions there will likely spur an increase in transactions. “The U.K. is one of the most transparent markets and there was a quick correction in pricing,” John Slade, head of Direct Investment at DTZ, told CPN. “In the U.K., there were a number of funds, which were forced to sell assets early on due to fund redemptions–this helped the process in the market find a value at which a deal would transact. The U.K. is also the leading financial center in Europe, so it has been affected more early on.” DTZ’s report concludes that with an anticipated peak in yields later this year, premier office properties will carry unheard of price tags and investment activity will pick up, despite the fact that positive rental growth is unlikely to occur before the end of 2010 or early 2011. Depreciation of the sterling is turning foreign eyes toward the market, as well. “The London market looks as if it is going to see good levels of activity in Q2 and it certainly feels as if we are at or close to the bottom in terms of value,” he said. “Unfortunately, I do not think that this is going to be a V-shaped curve–it will be more of a U-shaped curve and it is going to take s ome time to scale to heights on the up-curve.” The U.K., however, was alone in its first quarter success of neither gaining nor losing ground in transaction volume. Investment activity dropped a staggeri ng 70 percent in France, and tumbled 50 percent in Germany. Transactions in Europe as a whole plummeted 30 percent from the previous quarter for a total of just €11 billion, marking a 10-year low. As for pricing adjustments, the pattern is quite random. “Across Europe the correction has been at differing paces, some of this relates to valuation methodologies,” Slade noted. “Parts of Europe also lagged in terms of when they were impacted by the financial crisis.” Indeed, deals were few and far between in Europe during the first quarter, but there were a f ew notable trades. Again, the U.K. stood out, recording the two largest transactions of the quarter. F&C REIT Asset Management and AREA Property Partners shelled out £650 million for Dawnay Day’s predominantly retail U.K. portfolio, and London & Stamford acquired British Land Plc’s 50 percent stake in Meadowhall shopping center in Sheffield for £588 million. While stabilization appears to be within reach in the U.K., overall, DTZ expects investment activity in European real estate markets, perhaps with the exception of Central London, to remain lackluster for the next few quarters. “The U.K. volume in Q1 09 was still one of the worst on record, but it is too early to say we have reached the bottom.”