Europe catches up with UK commercial property

UK investment property is performing well compared to other markets but no longer leads the pack in Europe, says the RICS Global Property Survey.

Investor and business demand, according to a May 8 article on the RICS website, has started to pick up in other major European centres, notably in Germany and Italy, and investment in commercial real estate worldwide is rising at its fastest pace in 18 months.

The sector is shaking off the pressures of high oil prices and renewed investment competition from strengthening stock markets. RICS has forecast total returns on UK commercial property to attain a healthy 17% in 2006, falling to 9% for 2007.

Investors are piling into European commercial property regardless of sluggish, static, or even negative rental trends.
Business property demand is firm in Germany and France but high levels of vacant space are still holding back rents.
In the UK, rents are picking up, primarily due to a stronger London office market, which has benefited from rapid growth in the financial sector.

The emerging markets of Asia and Europe topped the growth league in business demand for commercial space in the second half of 2005. In Asia – notably India and China – demand is driven by breakneck economic expansion, while economic growth following EU membership has created high demand for office space in eastern and central Europe.

Demand for office space is rising not just in boom towns like Shanghai, but also in the previously stagnant Tokyo market.
Emerging economies are seeing the strongest rises in investment activity. Much of this in China and India is purely domestic as foreign investors remain cautious about opaque real estate markets.

This is less true of the fast-modernising markets in emerging Europe where foreign money is particularly important.

RICS chief economist Milan Khatri adds:
"Low interest rates have been the primary fuel for a surge in demand, though by the end of 2006 we are likely to see these rising across the 12 country eurozone, the USA and Japan for the first time since the late 1980s.

"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 that the tremendous returns made by investors in recent years are unlikely to be sustained in more mature property markets."
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