The UK property market is still proving to be the strongest market in Europe despite the possibility...
The UK property market is still proving to be the strongest market in Europe despite the possibility of rising interest rates. The commercial property sector has been the best performing area in the UK as valuations in the residential market begin to look stretched.
According to Jones Lang LaSalle's latest European Capital Markets bulletin, the UK accounted for half of total property investment in Europe last year and is Europe's top property destination.
James Crawford, director of investment at FPD Savills, says: "The London market has had four very bad leasing years and is starting to pick up again. The investment banking industry is re-employing people as well as city lawyers. The tenant situation is picking up and rents are starting to recover as the leasing market becomes stronger."
According to Crawford, property investment has been very strong across the UK. There has been demand for investment in shopping centres and driving this has been cheap debt for both private and institutional investors. Overseas buyers in Europe and the Middle East have also shown a great deal of interest in the market. The problem has been there is not much to buy at the moment and that has driven up prices.
Ian Whittock, head of the research team at ING Real Estate, says: "Overseas buyers like the UK because of longer leases, the environment is transparent and it is easier to buy property.
"The yield on commercial property in the UK has been higher than other investments and so investors have been prepared to pay more."
According to Whittock, the fundamentals have turned in favour of the commercial property market. The downside risk is behind us and the outlook for rental growth is positive. There is strong growth in the economy and interest rates have been at historical lows - even if interest rates go up it will not affect it, as the yield is too great.
For the commercial market, Whittock thinks the focus for investment is now on London and greater London than regional areas as these places will benefit most from an upswing in the economy.
Presently, Whittock favours shopping centres as this sector has been re-rated more than the rest of the market. However, he warns that when consumer spending does slow down there could be a move back towards offices
Whittock says: "The industrial sector has been good because of high yields, rents have not been falling and vacancy rates have not been high."
One area that Whittock does not favour at the moment has been the residential market. He thinks this is overvalued and believes a correction will occur. However, he is not predicting a crash and is unsure as to when this correction will occur. The main reason behind it will be because first-time buyers have become increasingly priced out the market. The market is currently been dominated by buy to lets.
For the residential market, Whittock favours the regional areas like greater London and the South. Valuations have now become stretched.
Elsewhere in Europe, according to the European Capital Markets survey, the Nordic region (Sweden, Denmark and Finland) overtook France as the most active investment market after the UK, due primarily to strong activity from foreign investors in Sweden. The Nordic region accounted for 12% of total European investment compared to France's 10%. The research of Jones Lang LaSalle's also highlights central and eastern Europe, where investment volumes rose for the fourth year, with foreign investors again dominating the market.
Looking forward to 2004, Tony Horrel, CEO of European Capital Markets at Jones Lang LaSalle's, predicts: "The outlook remains positive for the Europe's real estate capital markets in 2004. We believe investment volumes will be similar to those in 2003, as real estate remains an attractive investment in relation to other asset classes. While some capital will inevitably be drawn away if the recovery of equity markets gathers momentum, we believe this could be offset by increased activity from institutions, who are up weighting commercial property in their portfolios."
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