Nov 16, 2012
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Commercial real estate in Europe: prime locations still resilient

Nov 16, 2012

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Prospects are flat for the commercial real estate business in Western Europe in 2013, according to BNP Paribas Real Estate. In a study unveiled at the MAPIC trade fair, upscale prime addresses are most in demand in this period of uncertainty.

In France, cities like Lyon, Nice, Toulouse and Bordeaux showed the strongest rental growth, with a double-digit increase in growth rates for the second quarter. France was also the only major European country to record an increase in retail investment over the last 4 quarters, up 17%. "The lower share of shopping centre deals — as the availability of these products has been reduced — was compensated by strong demand for prime high-street retail," said BNP Paribas Real Estate in a press release. However, France also had the lowest "prime" high-street yield of 4% and 4.90% for shopping centers. Yields for retail warehouses also continued to decline, reaching 5.80% at the end of the third quarter.

In the UK, if London still remains the most attractive European city for brands, vacancy rates in regional cities have increased since 2011, while prime rents stagnated in these areas. Prime high-street yields rose by 5% while shopping center yields edged up to 6%. The UK remained the largest European market for investment in retail, accounting for 7.8 billion euros, in spite of historically low volumes for the first half year, and a 50% drop at the end of the third quarter over the prior year.

Germany's stronger economic growth compared to its neighbors enabled it to attract many retailers in 2013, especially foreign apparel brands. Prime high-street rents grew on average 5% in major cities. "Further rental growth is expected given the unbalance between strong demand and very limited prime retail supply," said BNP Paribas Real Estate. Shopping center completions rose 50% in 2011 and look to be on track for continued increases in 2012 and 2013. Retail prime yields have been flat at low levels over the past four quarters.

In Spain, unsurprisingly, only rents for prime high-street stores in Madrid and Barcelona did not suffere under the country's austerity measures, a policy that is now causing a dearth of large commercial development, in turn strengthening already high vacancy rates. "In the absence of transactions in the prime segment, the retail yield remained stable at 5.50% in Q3 2012 but strongly under upward pressure," the study reported. "Indeed, owners are unwilling to sell property at the yields currently asked by investors."

In Italy, where the density of shopping centers remains low, most construction is taking place mainly in the north and central Italy. "Retail remains the most popular asset class," said BNP Paribas Real Estate. "Like in Spain, weak economic activity and higher risk significantly reduced retail investment ." Prime high-street yields began to rise slightly in the third quarter.

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