S&P says prospects for European property are poor

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EUROPE- Falling rents and rising vacancy rates across in Europe over the past six months mean the outlook for the real estate sector remains negative despite low interest rates and high capital values, according to Standard & Poor’s.

A new report by the ratings agency expresses concern that existing property valuations have been kept artificially high by reducing valuation yields as rents fall and vacancy rates rise. It also suggests that disillusioned equity investors have put their money in real estate pending a pick-up in equity markets.

Further weakening in the world economy will likely see rents continuing to fall and vacancy rates rising further. S&P suggests a slow and gradual recovery would best suit the European real estate market.

Europe’s real estate sector is in a no-win situation according to S&P credit analyst Tommy Trask who says that either a strong recovery or a further deterioration in the world economy will hurt it.

"A strong recovery would require interest rates to rise, with the result that companies with short hedges would find their margins squeezed. A recovery in the equity markets, on the other hand, would lead to capital flows out of property and result in falling capital values," he says.

Elsewhere the report suggests prime office rents in London and Paris are down by 10%-15% and that with further redundancies and restructuring expected in the corporate and financial services sectors, they are likely to fall further in the short term.

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