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Capital values fell in Q1 2009 in office markets across Central & Eastern Europe (CEE) due to widespread yield decompression and falling prime rents in some markets, according to CB Richard Ellis’ CEE Offices Index MarketView report.

CEE weighted prime capital values fell by 41% year-on-year (y-o-y) and 22% quarter-on-quarter (q-o-q) in Q1 2009. Declines have generally been steepest in Eastern Europe (EE), but more modest in some Central European (CE) and Southeastern European (SEE) markets. Whereas the y-o-y decline to capital values in Q4 2008 was caused entirely by yield decompression, falling prime rents in several CEE cities started negatively impacting the capital value index across the region in Q1 2009 for the first time since Q1 2005.

Prime office yields moved out substantially across CEE in Q1 2009. The CB Richard Ellis CEE weighted office prime yield (including Russia & Ukraine) stood at 9.85% at the end of Q1 2009, an outward movement of 93 basis points (bps) q-o-q and 286 bps y-o-y.

Despite the considerable aggregate movements, significant differences now exist within CEE’s sub-regions, as highlighted below:

Central Europe (Czech Republic, Hungary, Poland, Slovakia)

• The Central European capital value index fell by 13% q-o-q and 26% y-o-y in Q1 2009. Capital values have fallen more in Warsaw and Budapest, where prime rents have fallen in recent quarters. In Prague and Bratislava, prime rents have held steady through Q1 2009.

• Central Europe’s weighted average yield moved outward to 7.1%, which is 70 bps higher than in Q4 2008 and 139 bps higher than in Q1 2008. Every CE office market experienced yield decompression in both Q4 2008 and Q1 2009.

• The CE office rent index fell by 5.3% q-o-q and 7.5% y-o-y in Q1 2009. It is likely that downward pressure will remain on CE prime rents, although CE market rents are more sustainable than most other CEE markets.

Jos Tromp, Head of CEE Research, comments: “While rents have moved down somewhat in Budapest and Warsaw, rental movement has been relatively modest so far in Central Europe. Central European markets, like all CEE markets, are faced with reduced liquidity, there is evidence of institutional investor interest in prime office buildings in Central Europe, especially in Prague and Warsaw. The Budapest office market is feeling the impact of a gloomy economic outlook and the market in Warsaw has expressed its more volatile character compared to Central Europe’s other office markets. Outward movement of yields in Central Europe in Q1 2009 helped to reestablish a more significant yield gap compared with the EU-15, making pricing in Central Europe more aligned with its Western European counterparts.”

Southeastern Europe (Bulgaria, Croatia, Romania, Serbia)

• Southeastern Europe’s capital value index fell by 14.4% q-o-q and 29.1% y-o-y as yield decompression and moderate rental decreases took a toll on capital values. Capital values in SEE are now at levels comparable to late 2005.

• The SEE weighted office prime yield stood at 9.62% at the end of Q1 2009, 231 bps higher than its Q1 2008 level. Yields in Belgrade and Zagreb have moved out less thus far than those in Bucharest and Sofia.

• The SEE rent index fell by 4.4% q-o-q and 7.2% y-o-y in Q1 2009.

Tromp explains: “From the remaining pool of potential buyers, institutional investors are extremely cautious about Southeastern Europe purchases and opportunistic buyers require much higher returns. These factors are contributing to longer deal completion times and rising yields. On the occupational side, several Southeastern European markets still have substantial confirmed pipelines that will be delivered in the next two years, which is likely to put further pressure on rents.”

Eastern Europe (Russia, Ukraine)

• The Eastern European capital value index fell by 33.0% q-o-q and 57.7% y-o-y in Q1 2009 (measured in USD). The index has been stung by rapid yield decompression and falling rents in every EE market in recent quarters.

• The EE weighted average yield was 12.81% at the end of Q1 2009, which is 128 bps higher than at the end of 2008. Yields have moved out sharply in every office market in the region in the last two quarters.

• The EE prime rent index fell by 26.0% q-o-q and 35.1% y-o-y in Q1 2009 (measured in USD).

Tromp comments: “After a period of rapid yield compression and rental growth from 2006 to early 2008 in Eastern Europe, investors are now returning to traditional risk profiling and the Eastern European markets are consequently repricing in line with this behavior. Although the outlook for rents and yields in Eastern Europe is difficult to predict, existing political and economic risks in the sub-region make further outward yield movement and downward pressure on rents possible this year.”

Source: CB Richard Ellis

via Capital values fall 41% across CEE due to falling rents and yield decompression (CEE).

The unprecedented 100 percentage point spread of performance within the European unlisted real estate property fund market in 2008 reflected the geography of investment returns, the impacts of leverage, and a further penalty for some investors of adverse currency movements, research based on the new IPD European fund indices reveals.

According to the inaugural bi-annual IPD European Pooled Property Fund Indices 2008 (e-PPFI) – reporting the NAV based total return performance of 203 predominantly core and value-added funds representing a total NAV of 121 billion euros – European unlisted pooled funds delivered a local currency time-weighted total return of -7.4%, which translated to a -14.8% return to Euro denominated investors, each of whom suffered the added pain of a major fall in the sterling-euro cross rates.

Both of these figures, however, mask a much more complex set of competing influences. Across the database, performance varied dramatically – from -80% to +25%, in local currencies. The pattern of fund performance, either side of the -7.4% value weighted average, is almost entirely explained by the geography of investments, with UK pooled funds falling to the left of this average and mainland Continental funds to the right, as indicated in the fund ranking graph shown above.

The reported six-monthly Indices numbers are constructed on the same basis as for all other fund indices published by IPD, and demonstrate the imbalance between the two halves of 2008 – with most of the decline experienced in the second half year.

By comparison with other investments, European pooled funds outperformed European equities and property equities which both delivered deeply negative returns at -38.5% and -48.6% respectively, according to the MSCI Europe and the FTSE EPRA/ NAREIT indices. However, unlisted European property funds underperformed European bonds, which returned 7.7% over 2008.

The full picture of direct property performance at a European scale will be released on May 11th 2009 in the IPD Pan-European property index.

source : IPD

via European pooled funds suffer both market and leverage woes, says IPD.

Direct retail real estate investment in Continental Europe totalled €980 million in the first quarter of 2009, 37% down on the previous quarter (€1.5 bln.), according to new research from Jones Lang LaSalle. Western Europe accounted for the vast majority (89%) of transaction volumes as European investors are increasingly focusing on their home markets. The proportion of retail investment volume accounted for by domestic investors has increased from one third in 2008 to over half in Q1 2009.

Jeremy Eddy, Director European Retail Capital Markets, Jones Lang LaSalle, said: “Investors continue with their ‘wait and see’ strategies in Continental Europe, with most markets seeing some fall in prices in the first quarter. At the same time, the high cost and lack of access to finance continues to restrict market liquidity, particularly for larger transactions. There is demand for prime product in the best locations and low vacancy rates in many top schemes provide the secure long-term income that investors seek.”

Italy and Germany were the most active markets in Continental Europe, accounting for 31% and 28% respectively of total transaction volumes. In Italy two deals over €100 million were completed: the Barberino Designer Outlet centre and the Centro Rondo shopping center in Monza, while Germany was the most active market in terms of the number deals – nine completed in Q1. Investment into Central and Eastern Europe was quiet, due in part to the lack of domestic investors in these markets.

Shopping centers were the prime target for investors but accounted for just over one third of the total volume transacted, compared with 55% in 2008, reflecting the lack of prime product on the market and the difficulty in raising finance for funding larger transactions. Nevertheless, shopping centers with strong defensive qualities in terms of location, scale, tenant covenant and quality remain a key target for investors in 2009. Factory outlet centers, accounting for 26% of transaction volumes, were also a target in Q1, as Henderson and Neinver consolidated their outlet portfolios.

In comparison, transaction volumes in the UK totaled of €1.3 billion in the first quarter – up 54% on Q4 2008, although the sale of a 50% stake in the Meadowhall shopping center accounted for almost half (48%) of this volume. Investor interest in the UK market is increasing following a sharp outward movement in yields, but this re-pricing does reflect on-going concern about rising vacancy rates even in prime locations.

Turning back to Continental Europe, Ferenc Furulyas, Head of Capital Markets Hungary, concluded: “We expect that as the year progresses and buyer and seller expectations are increasingly aligned and the market moves towards fair value that transactions will be forthcoming. Two major drivers to this will be the realization of valuation markdowns and a restricted return of liquidity from the banking sector.”

Source: Jones Lang LaSalle

via JLL: Retail real estate investment down in Continental Europe in Q1 (EUR).