Quarter 2 Records Shrinking Investment Volume and Rising Yields throughout Europe

A report prepared by Atisreal International Research Department in conjunction with Atisreal Ireland confirms that Commercial Property Investment volume fell further in Q2 of 2008 to €8.6 billion, its lowest level since the first quarter of 2004 and a 67% drop over Q2 of 2007. The volume of investment in Commercial Real Estate in the first 6 months of 2008 totalled €22 billion, a 53% drop compared to the same period in 2007. 15 of the 18 cities experienced a sharper fall in Q2 compared to Q1 as the effects of the sub prime crisis and overall economic gloom continue to deepen.

In Central Paris, investment volumes fell sharply in Q2 falling over 50% compared to the same period in 2007 and dropping 24% when compared to the first quarter of 2008 to just over €1.5 billion. This fall in activity is influenced by the scarcity of large (€100m +) deals. Prime office yields in Paris now stand at approximately 4.75%, a rise of almost 100 basis points since Q2 2007
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The big six German Cities (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich) have experienced a drop of 74% compared to Q2 2007 and 23% over Q1 2008. However Frankfurt and Hamburg actually enjoyed a volume increase of 14% and 66% respectively in the same period

The investment volume in Central London declined by 75% compared to Q2 2007, with investment in offices being hit particularly hard (from €9 billion in Q2 2007 to €1.9 billion in Q2 2008). The poor prospects for rental growth combined with currency and general economic uncertainty together with rising yields is a major cause of concern for investors. Prime office yields in London now stand at approximately 5.25%, a rise of approximately 150 basis points since Q2 2007.

Investment in Madrid fell 36% to €602 million in Q2 2008 compared to Q2 2007. The drop over the first quarter is 76% however this comparison is slightly distorted by the exceptional sale and leaseback deal by Banco Santander for €1.9 billion. Prime office yields in Madrid now stand at approximately 5%, a rise of almost 110 basis points since Q2 2007.

The volume of investment in Brussels has remained stable over the past 12 months with a modest drop of 13% in Q2 2008 compared to the same period in 2007. The office market remains strong. Indeed prime yields in Brussels have hardened slightly over the past 12 months and now stand at approximately 5.35%.

Investment activity in Ireland in the first six months has totalled approximately €350 million, a drop of approximately 66% on the same period last year. Half the total investment volume in 2008 was produced by just two deals at Donabate (Tesco Sale & Leaseback) and Carrickmines Retail Park, Dublin 18. Prime Office yields in Dublin now stand at approximately 5%, an upward shift of 75 basis points in the past 12 months.

The credit crunch, now into its second year, continues to have a negative effect which continues to deepen. A number of other factors continue to overhang the market including the concerns over the health of the US economy, an anxious and volatile financial market, the appreciation of the euro, the recent slowdown in manufacturing and services and the rising cost of energy. Another factor worth noting when analysing 2008 volume activity is the fact that many of these transactions were originally negotiated and agreed in 2007 when the overall economic situation was healthier.

It remains to be seen if a further outward shift in yields and perhaps an interest rate drop in early 2009 will be enough to stimulate improved demand in the investment marketplace. According to Peter Flanagan, Director of Investment, Atisreal Dublin, “the classic dilemma facing the market at present is that the majority of buyers are still expecting prices to fall further while at the same time sellers are reluctant to accept current price corrections. Consequently there are few agreements and few deals. A route around this impasse is unlikely to be found until 2009, requiring a marked improvement in liquidity and sentiment. The Banks will have a major role to play in the recovery”.

source : Atisreal