Foreign and local capital keeps piling into core markets in Italy, Spain and Portugal because investors have the correct expectation that office rents are set to rise significantly, delegates heard at PropertyEU’s latest Southern Europe Investment Briefing.
There was a delayed reaction after the financial crisis and Southern European markets fell out of favour to a mere 3% of the total European market. In 2012 there was almost no transactional activity, but in 2013 the recovery started to accelerate and since then there has been a four-fold increase in investment activity, according to CBRE data presented at the event held at CBRE’s London headquarters on Wednesday.
Prime office prices, which had fallen, have been rising in line with demand and now look expensive in yield terms relative to the rest of Europe. Rents however, which had fallen significantly but in line with falls elsewhere in Europe, are still feeling the impact of the crisis. ‘The big difference between European and Southern European markets is the lack of movement in rents so far,’ said Michael Haddock, senior director, EMEA research at CBRE. ‘Rental recovery in these markets is lagging, which means that the potential is greater than elsewhere.’
CBRE’s rental forecasts for the main cities in Italy, Spain and Portugal are at the top end of expectations, Haddock explained: ‘If you add the yield to the 5-year rent forecast you end up with an expected outcome that puts these markets at the very top of the range, which explains which they continue to attract such strong investor interest.’
The recovery of the Southern European markets has been due to foreign investors who saw an opportunity to enter markets at the right time. ‘It was actually driven by US investors, and not for the first time,’ said Haddock. ‘It happened in the London market in the mid-Eighties and it is a regular cyclical event that US investors spot value in markets that Europeans seem unable to see.’
The reason Americans were first, said Dietmar Zischg, partner at CMS Adonnino Ascoli & Cavasola Scamoni in Milan, is that ‘private equity companies can take risks that closed-end funds cannot assume. They were able to persuade their investors to include countries like Italy in their deals.’
US investors seem to have lost none of their appetite for Southern markets, and have been joined by Middle Eastern and Asian investors as well as local REITs, all looking for the best assets in an increasingly competitive environment. Spain has been at the vanguard of the recovery, while in Italy and Portugal GDP growth has been below trend but is now moving in the right direction. ‘There is no sign of growth or interest in the Spanish, Italian and Portuguese markets slowing down,’ said Haddock. ‘Our expectation is that 2016 will be another strong year.’