Building Momentum in Europe

Europe’s early summer gains appear to be consolidating as we head towards the run in to year-end, with August seeing a 3.3% increase in the EU’s Economic Sentiment Indicator and a near 12% increase on the year.

What is more this is broadly based: 22 out of the EU’s 28 countries saw a step up on the quarter while business surveys reported an improvement in production, orders and expectations. Consumer surveys surprised even more markedly on the upside, standing at their highest for over 2 years.

While these changes are from a low base and are still uneven, it does appear that some real momentum is building and, indeed, spreading, with even Europe’s “troubled fringe” seeing some measure of a bounce.

This firmer sentiment is also being mirrored in the property sector and values have responded, with prime yields/cap rates coming under pressure to fall and prime rents stabilizing or edging up.

Of course, activity in much of the market is still volatile and often constrained by limited levels of supply. Particularly for occupiers this may be slow to change, with construction indicators still weak in many areas, but even here the outlook is brightening, with more markets now improving than declining.

At the same time, more demand will emerge in the remainder of the year, with businesses and investors turning their thoughts away from merely surviving to shaping their strategy for the future.  Certainly among occupiers a lot of this activity will remain as much defensive as expansionary and we should also expect more business failures as banks relax support for the walking wounded. Among investors, strong interest in prime assets is still underpinning demand, but a spreading of interest beyond just the core is becoming more notable as more buyers get comfortable again with risk.

Overall therefore, the tide does appear to be turning and doing so quite quickly. As a result occupiers may need to assess their opportunities in today’s market more rapidly than they might have expected while investors will have to expand their horizons to access stock but at the same time must be realistic on pricing. They also of course need to stay tuned in to the risks that still persist due to debt imbalances and global geopolitics but which also now include market reactions to the end of QE and the normalisation of interest rates that will start at some point.

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