PROGNOSIS – Core markets in 2004
In 2004 I expect real estate returns in core markets to continue
to benefit from relatively high levels of investment, notwithstanding
a probable continued recovery in equity markets. In many markets
this will be in spite of a continued failure of market fundamentals.
In the office sector it is difficult to see any sustained recovery
in demand for space emerging in 2004.
| London |
London is the most difficult of
the core markets to call. On the positive side there are
indications of demand stirring
in the undergrowth. On the other hand the supply data, in the
City at least, looks pretty grim. On balance I expect City
rents to continue to fall to an end 2004 value of €900
per m2 per annum, whilst West End rents stabilize at their
current levels. |
| Frankfurt |
The decline in this market has some way to
go. A vacancy rate of some 14% and negligible demand have
lead to increasing
incentives. I anticipate a further fall in rents of 10-15%
with an end 2004 value of €360 per m2 per annum |
| Paris |
Paris seems to be slightly ahead of Frankfurt
in the cycle. The vacancy rate is a far more manageable 6%
but again evidence
of demand is thin and incentives are increasing. I anticipate
a fall of around 10% here with an end 2004 rental value of €595
per m2 per annum. |
| Brussels |
The European public sector looks set to stimulate
the Brussels market into action in 2004. Rents rose by 10%
or so in 2003
however I anticipate any rise in 2004 will be more modest.
I expect an end 2004 value of €285 per m2 per annum. |
| Madrid |
Vacancy rates in Madrid are under 7% and rents have fallen
back from their peak. Expectations for the Spanish economy
are high in 2004 and I anticipate that this will stabilize
rents and I expect little change in rental values. |
Core retail markets should be approached with caution in 2004.
In my view there is a reasonable risk of a marked slowdown in consumer
expenditure in the “spending” economies and a likelihood
that continued uncertainty will continue to constrain the “saving” economies.
None of this is good news for retail demand.
Industrial markets, at least in the Eurozone, look
strong candidates for core funds in 2004. Setting aside considerations
of income,
there appears to be room for yield compression in many of the
key distribution nodes. Potential investors should look for high
distribution
quotients* and take account of the structural changes affecting
the logistics sector.
By comparison, the prospects for the UK distribution market do
not look as rosy for 2004. Total returns for UK distribution
property have been driven mainly by yield compression over the
last decade – rental
growth has been disappointing. With yields around 7.25% (lower
around Heathrow) and weak rental growth there doesn’t seem
to be anywhere this market can go.
For income, the multi-let industrial estate should
be the investment of choice throughout the EU. As ever, identification
and acquisition
of stock are problems that we have a pressing need to address. * Distribution quotients are explained fully in Benchmarking Distribution
Property in Europe available early in 2004.
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