The first quarter of 2008 confirmed that the widely expected slowdown in capital markets is progressively spreading across the continent. No longer a ‘UK-only’ phenomenon, the fall in investment activity is now evident across most European markets, as is the rise in yields. At just under €37 billion in Q1 2008, European investment activity has fallen 36%, compared to Q4 2007 when around €58 billion was transacted.

The deteriorating financing conditions meant that activity slowed, most notably impacting on large assets and portfolio deals, which dominated the market in 2006 and 2007. However, it is pricing, or rather the correction in pricing that has limited activity. Potential buyers and vendors, faced with an uncertain market, are generally adopting a ‘wait and see’ approach where they can. Pricing expectations have also been slow to adjust and, where there is no pressure to sell, the gap between buyers’ valuations and vendors’ expectations is substantial.

In the first quarter of 2008 the CB Richard Ellis EU-27 Average Prime All Property Yield Index increased for the third consecutive quarter to 5.33%. A quarterly shift of ten basis points was recorded, with the office sector seeing most change and the retail sector proving more resilient.

So far the price corrections across the real estate market have been driven by the changes in the financial and debt markets, rather than reflecting the underlying market fundamentals of supply and occupier demand. As such, the biggest yield shifts have been in the markets where yields were lowest –relative to ‘risk-free’ government bonds. This is because the market is now driven by yield-focused equity investors, such as the German Open-ended Funds. On the other hand, the less volatile markets, such as Vienna or Brussels, are proving more resilient to price corrections. Looking forward, yield shifts will start to be more reflective of the individual market fundamentals.

European Captial Markets 2008 PDF