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• The probability of a downside scenario with multiple eurozone exits is higher than ever. This has caused occupiers and investors to overcompensate for risk when defining their strategies
• EMEA occupiers are expected to continue to be overcautious on expansion and focus on cost savings, despite largely maintaining profitability. On a positive note, occupiers will be able to realise significant savings by re-gearing leases in many European markets, under the downside scenario.
• For investors, we expect no widespread tenant defaults or increasing vacancy rates as a result, property cash flows (including non-prime) are likely to be stable. In order to achieve excess returns and have sufficient deal choice, non-prime is the next frontier for European investors in 2013
• Solid recovery in investment volumes for 2013-14. The continued release of stock by banks should see more product and clarity on pricing, allowing more investors to go beyond prime.
Occupiers and investors are overcompensating for risk when defining their operational strategies according to research published today by DTZ, a UGL company. DTZ’s Annual Outlook report highlights that to achieve excess returns with sufficient deal choice, non-prime is the next frontier for investors in the next two years.
The continuing uncertainty surrounding the European sovereign debt crisis is dampening economic growth globally. In the medium term, Europe returns to growth under the base case. However, a significant degree of uncertainty still remains around the base case. This is highlighted by Oxford Economics’ estimate of the worst case (multiple eurozone exits) scenario doubling to 20% over the past year. This is the highest ever probability so far.
Magali Marton, Head of CEMEA Research at DTZ and co-author of the report comments: «Under the base case scenario, the UK and Germany will show stronger than average rental growth with rents rising by 2.6% and 2.2% respectively in 2013-2014. This is mainly due to improved economic conditions and a lack of Grade A space. Occupiers in Southern Europe are unsurprisingly expected to see rents fall under all three scenarios. The impact of eurozone break-up under our downside scenario will lead to sharp rental declines of 17% to 2014. The Nordics, the UK and Germany are left relatively unscathed under the downside scenario».
Further analysis of individual markets in Europe implies that across the five most affordable markets the decline under the downside scenario is at or below the European average. These non-core markets are at low levels already and not expected to see a strong recovery in the base case. This is in contrast with the least affordable European office markets such as London West End and Paris CBD which are significantly impacted in the downside scenario. This means that tenants would be able to lock in cost savings in the two biggest office markets in Europe under the downside.
Hans Vrensen, Global Head of Research at DTZ, and lead author of the report said: «From an investor perspective, we expect no widespread tenant defaults or increasing vacancy rates, as new supply will remain limited. In addition, we suspect occupiers will remain overcautious on expansion and focus on cost savings. Many occupiers are opting to stay put and renegotiate existing leases. This means that property cash flows (including non-prime) are likely to be more stable than feared by many».
Vrensen comments further: «So as a result, outward yield movement seen in secondary properties has been beyond what we think is reflective of the actual risks, especially when taking into account our solid forecasts for lower quality office rents around Europe».
Many non-core investors, having raised capital, are becoming increasingly frustrated with the lack of distressed opportunities. Lower quality properties are expected to be the next logical step for them to realise excess returns. Furthermore, rents for Class C offices are forecast to be stronger than for Class A in the next five years. This is partly due to the lower absolute starting point of Class C rents today, after recent declines or low growth. But, it is mostly a testament to the solid demand for space from small and medium sized enterprises (SME) and limited new supply coming on-line in this segment of the market. In short, fear of significant declines in rents across lower quality offices is overstated by most market participants.
Following an estimated 4% decline in investment volumes to EUR 108bn in 2012, DTZ expects investment market conditions to remain tight with investors still cautious to move up the risk curve. However, the continued release of stock by banks should see more product and clarity on pricing, allowing some investor to go beyond prime leading to a recovery in investment activity with volumes rising to EUR 113bn in 2013 and further growth in 2014 to EUR 118bn.
FOR FURTHER INFORMATION CONTACT:
Anastasiya Dubova
Marketing and PR Executive
DTZ Ukraine
044 2203060
095 2720771
hans.vrensen@dtz.com
