London, 22nd December 2006 – Jones Lang LaSalle expects European transaction volumes to be in the region of €200 billion for the whole of 2006 and believes that while some risks remain, the stable economic backdrop and improving market fundamentals, together with an ever-increasing weight of money, provide a positive outlook for Europe’s real estate markets in 2007. Real estate investment in Europe will continue to be dominated by activity in the big three markets of the UK, France and Germany in 2007, although there will be more activity in Europe’s new and emerging markets, according to Jones Lang LaSalle’s European Capital Markets Outlook 2007.
Tony Horrell, CEO of European Capital Markets at Jones Lang LaSalle commented: “Expectations have improved over the course of 2006 and despite slightly lower economic growth compared to this year, the outlook for 2007 remains positive. We have also reached a watershed in the growth of Europe’s indirect markets, with a wide range of public and private, debt and equity opportunities, providing the ingredients for an increasingly sophisticated market in 2007 and beyond.”
He continued: “We see no sign of investor demand declining during the course of 2007 and expect the flow of funds allocated to real estate to continue. We expect over €4 of money to be chasing every €1 of product as investors continue to target real estate, and those frustrated in 2006 are likely to be keen buyers in the early part of 2007.”
Highlights
Countries - Ireland, Spain and Sweden are expected to provide the strongest economic growth while Italy and Germany are expected to lag. We do however see upside potential in Germany supported by stronger domestic demand, improving economic indicators and business confidence. The Czech Republic and Poland are expected to deliver strong growth and Romania will be among the winners, reflecting strong personal consumption and investment. Russia, which has seen investor activity more than quadruple in 2006, will see further growth and become one of the largest investment markets for retail in 2007. Turkey will also grow its share of investment activity, along with further opportunities in the smaller markets of Central Europe, the Baltics and in the Commonwealth of Independent States.
Rental Growth - Rising demand and lower vacancy rates are being bolstered by positive economic growth with no major supply risks across Western Europe. We have revised upwards our view on rental growth for offices and retail on a year ago. In offices, cities such as Barcelona, London, Madrid, Moscow and Stockholm are among the strongest for rental growth. We also see good opportunities in German offices - Hamburg and Munich - where the markets are recovering on the back of positive economic growth and business confidence. In retail, Spain and Sweden will be the winners in terms of rental growth reflecting strong personal consumption.
Returns - Combined with stronger rental growth our latest view is for another year of double-digit returns across all sectors in Europe in a tight band of 10-13%. Retail warehouses and offices are expected to deliver the strongest returns, although there will be variation at the country level.
Yields - The scarcity of product will remain a factor in driving yields lower. At the prime end of the market bidding will be thinner as certain investors become priced out of the market. Second tier cities will be amongst the beneficiaries in 2007 as investors search for yield.
Sources of capital - Global investors will remain the dominant force across Europe where we expect to see increased activity from Australian investors and further activity from Middle Eastern investors, reflecting the continued growth in wealth from petro-dollars.
Indirect markets - 2007 will see the emergence of REITS in the UK and Germany, with legislation expected in Italy later in the year. We expect this to encourage significant market activity and to be attractive to a range of private investors. Legislation in both the UK and Germany will lead to increased trading in 2007 as those converting choose to sell non-core assets and reinvest to restructure and strengthen portfolios. In Germany we see corporates taking advantage of the new REIT structure by spinning-off their assets into these new vehicles. The arrival of a private REIT in France in the second half of 2007 will be a further driver of activity in this burgeoning market that will pave the way for private REITs in both the UK and Germany, where announcements in 2007 are likely.
Derivatives, which saw trades in excess of £2 billion in 2006, will provide further opportunities for investors in 2007. It will remain a relatively small but growing market in 2007 and will be increasingly considered as a means of hedging investment strategies, particularly where views diverge over future capital and rental growth.