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Direct Investment in European Real Estate Expected to Reach c. €85bn in 2010, Up 20% on 2009

According to Jones Lang LaSalle’s European Capital Markets Outlook - 2010


London, 6th January 2010 – Jones Lang LaSalle expects 2010 to be a challenging year for investors to navigate, with recovery uneven across Europe, according to a new report released today, Capital Markets Outlook 2010 – Uneven Terrain. Investors will find it difficult to secure product, to identify value and to establish pricing levels. Many investors and banks will still be working through legacy issues and refinancing remains a major concern.

Chris Staveley, Director, European Capital Markets, Jones Lang LaSalle said: “Investment volumes across Europe in 2010 will remain low compared with long term trends, but we still expect an increase of up to 20% on 2009 taking us back to 2002 levels of around €85 billion. Despite the fact that occupier markets have remained weak and will stay that way this year, we will see a growing wall of equity selectively targeting the real estate sector. The main focus of this capital will remain on well-let, prime assets and due to a lack of suitable opportunities, this has the potential to exert downward pressure on prime yields as it has done in the UK in the second half of 2009.”

Chris Staveley continued: “Almost every aspect of the market will appear uneven in 2010 including economic recoveries, bank lending and occupier demand and the market will continue to witness seemingly contradictory events such as yields hardening in markets which are seeing falling rents. However, the mood is decidedly more positive at the start of 2010 despite the considerable issues facing the industry. The reasons for this are more clarity and certainty over the future, an apparent recovery in the wider economy but it is also a bounce back from the depths of early 2009 and as such represents relief as much as it does hope.”
 
Nigel Roberts, Chairman of European Research at Jones Lang LaSalle added: “In 2010, the larger French and German markets will show higher levels of liquidity than in 2009; however, relative pricing will be back in fashion and as pricing in London and other core investment markets becomes too keen for some investors at this phase of the cycle capital will start to move around Europe. Other beneficiaries are likely to be in the Nordics and Central Europe where specific markets can offer prime product with improving market fundamentals.”

In the early 1990s the rental market recovery lagged the investment market recovery by three years. Jones Lang LaSalle believes that this cycle will be different and those prime office markets which are furthest ahead in their rental cycles are beginning to reach the bottom such as London, Oslo and Warsaw.

Nigel Roberts said: “Office rental markets are expected to recover more quickly in this cycle due to the tightening of the development pipeline, with the high levels of development being postponed or cancelled.  Overall in Europe we expect the pipeline in 2010 to be down almost 30% on 2009 and this will, in part, provide impetus for the eventual recovery in rents. On the other side of the equation, although the recovery in demand will be slow we believe we have already seen the bottom of the office take-up cycle. We expect gross leasing volumes to be up 15% in 2010 from 2009 (2009 was down 30% on 2008) although over the next five years take-up is unlikely to recover even to historic average levels.”

Jones Lang LaSalle expects prime office rents in Europe in 2010 to be down around 3% overall, but the slow recovery in demand combined with supply constraints will set the scene for broad but limited rental growth in 2011. The exception to this trend will be markets which corrected the most during the downturn, some of which could see the start of a more significant bounce-back driven by supply shortages.

Good quality retail space in both high streets and shopping centres is still sought-after. The sector will be resilient and although prime high street rents will see a fall of around 2% in 2010, some high street markets such as Hamburg, London and Munich will prove the exception and we expect to witness rental growth. Prime shopping centre rents across the region will remain largely stable.

In terms of working out their legacy issues banks now have more clarity around their real estate strategy than they had at the start of 2009 and this situation will only improve during 2010. A clearer strategy means that banks will begin to take the opportunity to start a steady release of saleable assets onto the market. Although this process has already begun we expect a greater flow of bank controlled assets being brought to market throughout Europe in 2010.