Credit crunch starting to hurt says C&W

By Jim Dow

THE full force of the credit crunch is now being felt by the European commercial property market, according to research by Cushman & Wakefield.

Investment volumes in the first three months of the year fell 37 per cent on the same period in 2007, while yields rose at their fastest since 1992. In the UK, volumes fell 52 per cent over the same period. With confidence shaken and uncertainty over pricing impacting almost as much as the lack of affordable debt, the market is ready for more to come, the report warns.

To date, however, the occupational side of the market has held firm, with prime rents rising 11 per cent in the year to March. As a result, total returns have remained in positive territory, with an all-sector prime average of 7.1 per cent for western Europe.

The report says the question is whether such performance can be sustained once the economic impacts of the financial market turmoil start

to show in job cuts, tighter borrowing and increased risk-aversion. In addition, the threat of stronger inflation highlights the continuing downside risks to performance.

“We expect rental growth to ease to around 3 to 4 per cent at best this year,” says David Hutchings, head of European research at C&W. “However, with markets in general not oversupplied and development being cut back by current trends in financing, building costs and risk appetite, an upturn in the market in 2010 could well deliver strong performance for investors.

“A growing number of equity investors appear ready to take advantage of this and look set to re-enter the market as soon as financing markets stabilise. As a result, we are still optimistic that the market will recover more rapidly than some seem to expect.”

The report adds, however, that with an uncertain outlook for the months ahead, it is no surprise that investors are now in a cautious and demanding mood.

According to Michael Rhydderch, head of the C&W cross-border capital market team: “Deals are taking longer and the due-diligence process is more protracted.

"Where funding is required, the extra scrutiny put in place by the banks adds further to the delay and uncertainty of transactions actually completing.”