EUROPE - A gloomy outlook for the European real estate industry is predicted by Standard & Poor’s research*. The ratings agency sees falling commercial property rents and rising vacancy rates across different property classes and regions.
The office marketplace, currently seen as the weakest sector, was singled out as being the "most susceptible" to changes in economic activity. Rents are falling significantly in many city centres. The supply from new developments is expected to peak later this year but will add to the existing vacant supply.
Retail, last year’s best performer, is still favoured by investors, but S&P points to the prospect of falling consumer spending. "Because retail assets offer the lowest yields, capital values are sensitive to a narrowing of the yield gap."
For industrial property valuation yields are considered to be "generally stable". But IT related developments have been severely hit by the fall in demand. New lettings have to be made at a high cost in terms of rent-free periods and fit outs.
Property companies continue to trade at large discounts to net asset value due to low inflation and limited capital growth potential. Their inefficient tax structure is highlighted by the stronger performance of tax efficient property investment vehicles, such as the Belgian SICAFI and Dutch real estate funds. The same could happen in France, with a new law leading to tax exempt status for French property companies.
S&P reckons that while tax exemption does not lead to stronger credit quality, it enables property investment companies to have a more conservative approach to investment, with "an emphasis on buy-to-hold rather than trading and speculative developments".
From a credit quality perspective, the agency sees a polarisation among issuers into those with secured and unsecured funding. While each strategy has its advantages and disadvantages, S&P points out that the securitisation route "clearly poses a major threat to existing unsecured creditors".
*‘Industry report card: European Real Estate’