New analysis sees positive outlook for European property rents in the medium term

Written by Ray Clancy

Friday, 20 August 2010 10:32

Investors could find that European property rental growth may deliver a positive surprise over the medium term, according to experts.

Consensus expectations for European rental growth over the medium term have become overly bearish and office rental is growth likely to bounce back more strongly, says Matthew Richardson, director of research at Fidelity Real Estate Investment Management.

Prime office markets in London, Paris, Munich and Stockholm are expected to be the star performers and investors who spot pockets of opportunity are likely to benefit, particularly over the medium term, he believes.

‘Our analysis indicates there is scope for positive surprise in many prime European office markets, with particularly punchy rental growth in key financial centres. This financial centre leadership will begin to broaden out into other property sectors in 2011 when economic recovery gains momentum,’ said Richardson.

On average, Fidelity expects European offices to deliver rental growth of between 2.5% to 3% pa over the next five years, with the star performers in key financial centres in northern and Western Europe.

London City could see growth of 7.5% per annum over the next five years, London West End growth of 7%, Paris CBD some 4% and Paris La Defence 5%. Stockholm is predicted to see annual growth of 5% over the same period and Munich 3%.

However, in an environment where fears of a double dip recession are increasing, commentators remain gloomy about the outlook for rental growth. According to one commentator, prime headline office rates have fallen over 10% in the last two years and rental growth remains negative across the overall market.

‘The headline numbers disguise the fact that rental prospects are rapidly improving in major business/office centres in northern and Western Europe. The market’s pessimism on rental growth expectations over the next 12 months is well founded, but we believe market consensus over the medium term prospects is being overly bearish. Just as people over-estimate how long growth will continue in an upturn, so we think people are over-estimating how long zero or falling rental growth will continue.,’ said Richardson.

‘The loss of jobs in the financial sector was not as severe as many analysts expected at the outset of the recession. We have recently seen employment growth in the financial and business service sectors of London, Paris CBD and Stockholm CBD as businesses re-gear,’ he explained.

‘Our analysis also indicates that there is a significantly lower chance of tenant default in the office sector. Our projected 12 month failure rate for UK office tenants has fallen steadily since the second quarter of 2010 and is now 1.48% compared with the UK All Property average of 2.89%,’ he added.

Another key reason for a positive outlook on western European markets is the supply side, said Richardson. ‘The supply picture is constrained by historical standards. In 2011, completions are projected to be just 1.1% of existing stock, their lowest since 1980.’