Europe Property Sales Growth to Slump to Zero, Knight Frank Says

  • Broker sees shrinking demand from Asia and Middle East
  • Rising rents and low vacancies an opportunity for developers

Offices and shops in London, Paris and Frankfurt may be a little harder to sell this year because of concerns over high prices and shrinking demand from Asian and Middle East investors.

The value of commercial property sales will probably be little changed in 2016, following three years in which it rose by more than 20 percent, property broker Knight Frank LLP said in a report on Friday. The deal volume for 2015 amounted to about 235 billion euros ($255 billion), according to the firm’s provisional estimate, approaching the 260 billion-euro record set in 2007.

"Although the investment case for European property remains strong, there are headwinds which may cause the investment market to lose a little of its recent momentum," Matthew Colbourne, a researcher at Knight Frank, wrote in the report.

The potential risks include falling demand from Asian buyers as China’s economic growth falters, and from Middle Eastern investors who are held back by slumping oil prices, Colbourne said by phone. In addition, the possibility of higher interest rates and concerns that prices have climbed too far will also hurt the market, he said.

Demand for European commercial properties, including offices, shops, warehouses and hotels, has been soaring as investors seek reliable rental income that beats low bond rates.

While rising prices have pushed down property yields in some cities to the lowest in two decades, real estate still returns more than bonds. For example, a well-maintained, fully occupied office building in the City of London yields 4 percent, compared with the Bloomberg Eurozone Sovereign Bond Index, which returned about 1.8 percent last year.

"Rising interest rates might unwind some of the attractiveness of buying property when borrowing costs go up," Colbourne said by phone. In cities such as London and Paris, some buyers are becoming cautious because prices are near 20-year highs. "Investors might want to take a rain check and assess whether these deals really represent good value."

The Federal Reserve in December raised its target range for the federal funds rate for the first time in almost a decade, ending an unprecedented period of record-low interest rates that sparked a real estate investment surge from Sydney to Stockholm.

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