LONDON-Slower rental growth and a widening divergence between capital values of prime and secondary offices will see investors shift focus this year to secondary assets in Europe, says realtor DTZ, although progress in different markets will diverge. Prime rents remain below peaks in many markets, attracting to occupiers for whom they had been off limits.
In its 2011 Global Outlook, DTZ said that the secondary market may diverge from prime property. The study forecasts a 5.4% hike in prime office rents in London, with only a 1.2% rise in secondary rents. Frankfurt office rents are sensitive to Germany's GDP, with investors in prime premises exposed to stronger rental growth in a surge scenario, compared to other European capitals.
The real issue in western Europe however is how to bridge the debt-funding gap, which DTZ estimates at $126 billion. It sees $145 billion of new equity available for investment, just sufficient to plug the gap. Yields are below their long-term average and some western European rental markets are approaching all-time lows.
Weaker economic growth in 2011 will act as a drag on occupier markets and rental growth, although this may be alleviated by new developments being completed, and rental growth will become the prime driver of capital values over the next five years, with little further yield compression, according to the research. Investors are expected to remain focused on prime premises, although a tightening of supply and subsequent price hikes will put secondary markets in the limelight, potentially closing the gap between prime and secondary yields and, in turn, causing a divergence between good and poor quality secondary, which could present a problem for banks holding distressed debt on such premises.
Allan Saunderson is a managing editor of Property Investor Europe and a contributor to GlobeSt.com.
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