2009 review and 2010 outlook for commercial real estate in Europe

The maturity profile of European real estate debt shows a high concentration of maturing loans in the next two years. Some of these will be difficult to refinance, not least because there are so few active lenders at present, or will result in foreclosures where the standing of the borrower is weak. This is unlikely to affect the prime market (where any assets brought to the market are likely to see healthy demand), but could have a profound impact on the secondary market. More broadly, the decisions and actions of banks towards their existing property loan books will be a key influence on the market next year.

Recent events in Dubai have served as a reminder that local aftershocks can persist for some time, and have also focussed attention on broader issues of sovereign credit risk. In markets where public finances are considered fragile (including Greece, Ireland, Hungary, Portugal and the Baltics), possible increases in the cost of debt to governments, and by extension to companies, could impair recovery.

Are we in a mini-bubble?
We don?t think so. While it is true that we are seeing increases in value ahead of any compelling evidence of an improvement in occupier markets, this increase is so far confined to a relatively narrow "prime" band of the property market. Equally importantly, many measures of yield and value are still in comfortable territory relative to long-run averages. For example, in a number of key markets including London, Paris and Madrid, prime office values are either below or in line with long-run averages.

This is not to say that there is no possibility of the rise in values stalling, or even reversing. For instance, a rise in inflation expectations and bond yields could be detrimental to values, as would any deterioration in investors views on the likely strength of economic recovery. On the basis of currently available market information and trends, however, pricing does not appear inflated. Indeed, in some parts of the market, yield relativities against risk-free assets still look attractive.