Pricing correction rationalises in European investment markets

The international property adviser stated that in comparison to the latter half of 2007, market softening is less accelerated with low leverage European investment funds, Middle Eastern investors and German funds being most active - especially in markets such as the UK where there has been a quicker reaction to the price adjustment.

Despite this, due to the decrease in portfolio transactions and a general preference for lots sizes of sub €100m, it reported a substantial decrease in total investments transacted. Volumes dropped by 55% in France, 50% in UK and 26% in Germany, comparing Q1 2007 and Q1 2008 transaction levels.

Giles Wilcox, head of Savills European cross border investment, says: "Rising yields are expected to stimulate renewed investor interest as some investments are getting closer to their fair value. However, transaction volumes have dropped due to lower availability of debt and we have seen some retraction from perceived riskier markets such as Eastern Europe."

Savills regional partners, Asteco, are of the view that pricing corrections in European investment markets will create an increased interest from Middle Eastern investors. Andrew Chambers, Managing Director of the company added: "Although the price corrections appear to be rationalising, we believe there will be considerable opportunities in the coming twelve months. As the general economic slow down in Europe continues (witnessed since April this year), particularly in the UK, there has been a further outward shift of yields. The equivalent yields suggest we are back at early 2005 pricing levels."

The report indicates that the driver for the investment markets is rental growth, especially in Western European markets, and identifies quality commercial property let to strong covenants as a key area of demand. It points to the retail sector as the slowest to react to the pressure of price correction, with retail warehousing yields in Germany, Greece, Poland, Italy and Turkey continuing to compress in Q1 2008, albeit other areas showed signs of softening.

Eri Mitsostergiou of Savills European research adds: "The latest economic forecasts project overall growth to ease across Europe, and for this reason we expect to see increased focus on the occupational markets. In Eastern Europe, where there has been greater momentum associated with higher growth, we are seeing yields stopping their downward trend, which will continue until the economic situation becomes clearer.