Market ReportThe turmoil in financial markets had a significant impact on European commercial property towards the end of 2007, according to a new report from James Cogavin of Savills HOK.
The report says the "credit squeeze" is also likely to take its toll on the market during 2008. Outward Irish investment in commercial property during 2007 - at about €8 billion - matched record levels achieved in 2006, it notes.
Yet most of this was before the credit squeeze in September and October.
This was not solely an Irish phenomenon, the report says, with commercial property trading down across Europe during the fourth quarter. Cross-border investment activity in Europe reached €18.7 billion in March 2007 but declined to €4.4 billion in October.
Continental property proved a popular choice for Irish investors during 2007 where they spent €4.3 billion. The high cost of finance and uncertainties with foreign exchange trading were key reasons for the Continental preference, the report says.
This is despite the somewhat slower growth in mainland Europe compared to the UK, yet Europe represented a safer bet in the medium term, the report states.
The two most popular markets were Germany and France, together attracting almost 55 per cent of Irish funds invested on the Continent.
These were followed by Spain (10 per cent) and Sweden (8.4 per cent).
The preference in Germany was for retail, a market aided by improvements in the jobs situation and consumer confidence. In France the preference was for offices with Paris, in particular, the target, says the report.
Eastern Europe lost its attraction for Irish investors. Hungary, Poland and the Czech Republic had been popular but the largest, Poland, accounted for 1 per cent of the funds invested by Irish investors.
Demand from Austrian and German funds has pushed yields down in these countries but growth potential remains in the long term, the report states.
The UK market covered all sectors with office and retail the key targets, and unlike Continental Europe where most Irish deals are done via banks, funds or syndicates, the Irish are more likely to go for direct investment in the UK market.
The outward shift in UK yields, particularly in the office market in central London, coupled with the continued weakness of the US dollar may cause Irish investors to refocus their attention on the UK in preference for Europe, the report says.
Instability in equity markets and the credit squeeze makes investors look towards "safe, stable, liquid markets", says the report.
This could be the UK office market but also mature western European cities for 2008.
The credit crunch will affect the market during 2008, creating uncertainty over property pricing and changing the loan-to-property-value ratio. A gap has opened between what vendors are demanding and what buyers are willing to pay. This will have to shake itself out in the coming months.
Meanwhile, the loan-to-value ratio for prime institutional stock has fallen from about 90 per cent to 70 to 75 per cent, the report says. This has occurred against a backdrop of rising borrowing costs.
The report is "cautiously optimistic" for 2008, with careful investors looking for opportunities and moving on the basis of a good deal.
"Given the current uncertainty in the market, investors should be focusing on the property fundamentals and markets where they can see value for money," says the report.
