Not as it seems

June 5, 2013 admin

This period of economic stagnation and turpitude in Europe — where, quarter after quarter, we await the GDP numbers for the various countries, and groan if they’re negative or breathe a sigh of relief if they’re positive — is throwing up some weird signals. As ever with Europe, the picture varies across countries, and so do the signals.

On the one hand, the United Kingdom recently missed on a triple-dip recession — it may even not have suffered the reported double dip last year, following further assessment of the numbers — and there is now talk there about the first signs of green shoots. (If true and if the green shoots can be nurtured into more substantial economic growth, that’s probably good timing from the coalition government’s point of view, with an eye on the 2015 general election. Maybe it’s true what they say about talking to plants to encourage them to grow.) On the other hand, first the European Commission, then the IMF and now the OECD have revised downward their short-term economic forecasts for the euro zone. They were bad before and they’re worse now.

And then there’s the real estate markets. Q1 2013 numbers from the main property consultants point to encouraging growth in transaction activity compared to a year ago — according to Cushman & Wakefield, for instance, the Q1 2013 number of €32.7 billion is 15.7 percent higher than that for Q1 2012, and Jones Lang LaSalle has the year-on-year increase even higher, at 26 percent. The consultants each have their own way of adding up the transaction numbers so come to different totals but the trend line is clear. A good start to the year, and upward.

But real estate markets are also throwing out weird signals. It’s well known, for instance, that investors in this climate are favoring safe-haven markets like London and Paris and are fighting shy of areas like southern Europe that are at the heart of the euro zone’s problems. (It’s interesting, too, that Mario Draghi, head of the European Central Bank, has yet to be tested on his we’ll-do-whatever-it-takes remedy for the euro zone’s ailments, so we don’t yet know whether that medicine works.) But all is not as it seems.

Recent research from Savills has shown that, contrary to expectation, markets perceived as stronger are offering higher rental concessions to tenants than markets perceived as weaker. Safe havens they may be, but even London and Paris have office landlords who are reacting to market conditions and tenant demands and protecting their interests. The Savills survey of headline rents and rental incentives offered by landlords in 19 European markets over the period since 2008 found that London City, Paris CBD and Paris La Défense currently offer some of the highest available discounts — approximately 20 percent of the total months over a lease term.

“Over the past five years, landlords in some of Europe’s prime office markets have lengthened rent-free periods to support headline rents,” explains Julia Maurer, European research analyst at Savills. “This means that markets such as London and Paris, where landlords should be feeling more confident, have surprisingly large incentives on offer.” On average, rent-free concessions for prime CBD space have increased by 21 percent across Europe in 2013 compared with 2008, the research found, and currently account for an average 12 percent of the total rental period in the markets examined.

The highest percentage of rent-free months offered in the markets surveyed was in Milan (25 percent), followed by the two Paris markets, CBD and La Défense (21 percent each), and London City and Dublin (each 20 percent). By way of contrast, Athens, where prime headline rents have fallen significantly over the past five years (by 30 percent), only offers 2 percent of months rent free. Savills points out that the higher take-up levels that are now becoming evident across Europe — more green shoots? — could lead to a reduction of incentives offered by landlords, and therefore have a positive impact on real rental growth.

Incentives, says Savills, are a good indicator of the general market sentiment in real estate but are determined by the usual mix of market factors, including supply and demand and individual local characteristics. In a Europe that is seemingly hell bent on federalism in the manner of the United States, it is clear that local market forces power events. The federal-intent politicians ought to remember that.

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Richard Fleming is editor of The Institutional Real Estate Letter – Europe.

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