The UK commercial property is no longer leading the market in Europe, while rising bond yields mean high returns will no longer be globally sustainable in the long-term, claims the Royal Institution of Chartered Surveyors (RICS).
In its Global Property Survey, RICS says although UK investment property is performing well, investor and business demand has started to pick up in other major European centres, particularly in Germany and Italy.
The survey also reveals investment in commercial real estate worldwide is rising at its fastest pace in 18 months, as the sector is shaking off the pressures of high oil prices and renewed investment competition from strengthening stock markets.
RICS has predicted total returns of 17% on UK commercial property in 2006, falling to 9% in 2007, as it claims investors are choosing European commercial property regardless of sluggish, static or even negative rental trends.
But it warns a rise in global bond yields could slow the global property market down, and suggests the recent returns made by investors are unlikely to continue in the long-term.
The report, based on information from more than 80 cities around the world, suggests demand for business property is firm in Germany and France, although high levels of vacant space seem to be holding back rents.
However, RICS claims rents in the UK are picking up because of a stronger London office market which has benefited from rapid growth in the financial sector.
Elsewhere in the world, RICS reveals emerging economies are seeing the strongest rises in investment activity, with demand in China and India being driven by breakneck economic expansion, and an increased need for office space in boom towns like Shanghai.
Although much of the activity in China and India is purely domestic, as foreign investors remain cautious about opaque real estate markets, RICS says this is less true of the fast modernising markets of central and eastern Europe, where foreign money is particularly important.
Milan Khatri, chief economist at RICS, says low interest rates have been the primary fuel for a surge in demand, though he warns by the end of 2006 it is likely these will rise across the 12 country eurozone, the USA and Japan for the first time since the late 1980s.
He adds: “With global bond yields already on the rise for these three economic blocs, some of the impetus will come out of the property market next year as foreign investor interest cools. As such, we believe the tremendous returns made by investors in recent years are unlikely to be sustained in more mature property markets.”
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