Europe commercial property dips

Source : Straits Times - 24 Jun 2008

But price drop unlikely to be as much as in the UK, says CBRE

Commercial property prices on the European mainland are adjusting downwards in the wake of a global credit crunch but are unlikely to fall by as much as in the UK, a senior executive of CB Richard Ellis said yesterday.

‘We are seeing elements of repricing but the repricing is not as severe as in the UK because it does not need to be as severe to get back to equilibrium,’ said Mike Strong, president of CB Richard Ellis in Europe, the Middle East and Africa (EMEA), at the Reuters Global Real Estate Summit.

CB Richard Ellis, a constituent of the S&P 500 Index, is the world’s biggest property services firm and generated about a fifth of its revenues last year in the EMEA region.

Mr Strong said that British commercial property values - down an average 18 per cent since last summer, according to Investment Property Databank - had started from a higher starting point after a vintage bull run.

‘On the up, none of the (other) European markets went over the tipping point. One or two of them got close but none of them went over . . . the point of unaffordability. Say the UK has shifted 100 basis points, then mainland Europe would have shifted by between 30 and 50 basis points . . . so the wind back is less,’ Mr Strong said, referring to property yields which have risen by around a percentage point in the last year.

He said that if yields - which measure rental income in relation to capital values and move inversely to price - were currently about 5.4-5.7 per cent for prime office property in central London, the equivalent in central Paris was in the ‘mid-to-high 4 per cents’, Mr Strong said.

But he said that direct comparisons with the UK were misleading because property investors had access to cheap debt.

‘You cannot directly compare European mainland yields with London because the arbitrage between the cost of money and property yields is different,’ he said.

Five-year sterling interest rate swaps - a benchmark for property borrowing costs - are currently trading at around 6.1 per cent, compared with 5.1 per cent in the case of euro interest rate swaps, according to Reuters data.

When asked where he would put his money, Mr Strong nonetheless singled out the central London office market.

‘I think, selectively, there is value in London,’ Mr Strong said.

‘I agree with the Kuwaitis,’ he said, referring to the £400 million (S$1.07 billion) purchase last month of the Willis Building in London’s financial district by the property investment arm of the state of Kuwait. — Reuters