European investment markets saw a relatively strong end to last year according to our recent research. In fact volumes rose 19% compared to the final quarter of 2011 and were at their strongest since 2007. What’s more this was accompanied by a stabilisation in prime yields and a notable uptick in investor confidence. But is this the start of a sustained recovery or just a correction to what in hindsight was an unnecessarily weak position earlier last year? Will we see investment surge forward or slip back in a classic dead cat bounce?
Certainly a lot of investors are talking the talk about moving up the risk curve, even if a lot don’t yet know what that means for their strategy – eg riskier countries or riskier segments in safer countries. We’re also seeing more stock emerge as banks and others get serious about deleveraging. We’ve even seen a slight improvement in debt availability, although this may be tested when banks start paying back emergency loans to the ECB.
To date there are some signs that investors are spreading their interest a little further to find prime assets and growth opportunities. In the final quarter for example, the big 3 of France, the UK and Germany remained dominant but did see their market share slip to 59% from 68% in Q3 and while the ultra safe Nordics were a chief beneficiary of this, Central Europe and the peripheral indebted countries of Greece, Ireland, Italy, Portugal and Spain also saw volumes increase – in aggregate to their highest for over a year.
However, while re-pricing is undoubtedly producing some interesting opportunities, in our opinion this is likely to be the start of a slow recovery. In fact, we’ve really only removed the fear that the world is about to end – there are still very real concerns over the economy and the outlook for income growth and sustainability over the short term. At the very least this means investors will be slow to really let go of their risk aversion and we can expect a few mood swings along the way as economics and the political picture dictate and no doubt as more “last chance” summits are held to resolve the next stage of the euro zone debt crisis.
2013 is therefore set to see a continuation of many of the trends from last year. On one hand the relativity of yields will stoke demand for secure assets and together with a steady improvement in stock availability this could push investment up by something like 5% over the year. On the other hand however, we can also expect a further splintering of the market, with some regions and business sectors performing much better than others. Hence even though some investors question the values now being attached to core property, prime yields in some markets may in fact compress this year and the gap with weaker secondary space will only increase.
European Research Group, London