by Matthew Colbourne
Despite various economic and political headwinds, sentiment towards European property remains positive.
According to Knight Frank’s European Commercial Property Outlook 2016, the European investment market enters 2016 on the back of an exceptional 2015. Provisional data indicates that annual commercial property transaction volumes rose by more than 20% compared with 2014. The main drivers of this increased activity – the stabilising Eurozone economy, low borrowing costs and wide yield spreads to other asset types – continue to attract large volumes of capital to the property sector at the outset of 2016.
Although the investment case for European property remains compelling, there are headwinds which may cause the investment market to lose a little of its recent momentum in 2016. These include the prospect of global interest rate rises, concerns over pricing and a possible slowdown in capital flows from Asia and the Middle East into Europe. Knight Frank’s expectation is that overall European transaction volumes for this year will be similar to 2015 levels, ending a run of three consecutive years in which volumes have risen by more than 20% annually.
Investors should be buoyed by continued improvements in European occupier market activity in 2016. Increased take-up was recorded in the majority of key office markets in 2015, and Knight Frank forecasts that aggregate European office take-up will increase by a further 10% in 2016. Although improved occupier demand has, to date, resulted only in moderate office rental growth outside of hotspots such as Dublin and London, rental increases should become more widespread in 2016, supported by the diminishing availability of office space in prime European markets.
Current occupier market dynamics will create contrasting development opportunities in 2016. Shortages of prime CBD office space and good rental growth prospects should encourage investors to explore city centre development opportunities across key European markets. Meanwhile, there will be opportunities to gain value by redeveloping less desirable Grade B assets and offices in secondary locations, and through their change of use to residential, hotel or student accommodation.