EMU requirements providing stable foundation for property
THE economies of Europe are, for the most part, preparing themselves for Monetary Union and the stringent requirements for entry are keeping growth in most countries at a low pace. On the positive side, this is providing a stable backcloth for property, with oversupplies declining and the markets finally moving out of recessionary mode.
Most European markets have now turned the corner and rental growth at the prime end of the market is a real possibility for a number of cities in 1997.
The downside is that there are no fireworks in sight, and demand based on genuine business expansion is rare.
The two exceptions to the weak situation in Europe are Ireland and the UK. Contrary to the other countries attempting to gain entry to the EMU, Ireland is experiencing exceptional economic growth. In parallel, the property market is performing strongly on all fronts, but particularly in the office sector, where international and indigenous demand for space are driving the market.
Ireland differs from many of the other European countries because the oversupply situation has been fully eroded, and low vacancy rates are driving rental values upwards.
The country is also in a period of sustained business confidence, fuelled by almost negligible inflation, stable industrial relations and consistently low interest rates.
Ireland has become a key location in the internationally mobile electronics and computer industry. The availability of well-educated staff and top-class telecommunications has also put it on the world map for tele-marketing, data processing and shared service centre activities by companies such as Oracle, Compaq, America OnLine, Intel and Hewlett.
This has greatly strengthened demand for lower cost business space, in a market where space is limited. A limited amount of speculative development is now taking place in the office sector, which is well timed to match the shortage of supply, but the majority of developers are still keen to pre-let before commencing building.
The retail sector in Ireland has been the subject of a massive supply of new space in the last 12 months. A total of 970,000 square feet of new space has been added to the market and in spite of this being close to a quarter of the existing stock, lettings have been successful in all of the new centres.
The Blanchardstown Town Centre is the largest of the new developments (463,000 square feet) and is reported to be trading very successfully. The intense competition for space in Grafton Street continues, especially among UK retailers seeking a high-profile presence in the Irish market.
The other property market in Europe to experience strong growth is the UK, where freedom from the constraints of first round EMU qualification appears to be driving growth. The economy is, like Ireland, in a more advanced state of recovery than most other European countries., Unemployment is low and falling, retail spending is improving and business confidence is strong. Inflation remains higher than the British Chancellor would like, and the question mark over EMU membership is creating some uncertainty.
The UK property investment market is strong, but demand is selective and restricted to properties in specified locations, let to good covenants, with either medium-term rental growth prospects or an opportunity to add value by active management or development.
German investors are very active in the market, and there is growing interest from the Middle and Far East.
Elsewhere in Europe, the markets resemble the curate's egg. Occasional highlights emerge - for example, office demand is improving in Belgium, Germany and France, and investment markets are strengthening in the Netherlands - but the positive forces in the market are being dampened by residual problems such as over-supply. of space (France, Germany, Hungary), shortage of investment opportunities (France, Italy, Austria, Spain) or a generally slow economic recovery.
High street rents in Europe are generally weak, as retail turnover remains flat in most countries. The exception seems to be the luxury end of the market which seems insulated from these problems.
This is nowhere more evident than in Paris and London. The best shopping centres are continuing to attract good business and the growth of cross border retail activity remains a strong feature.
The outlook for the coming year is good for most countries in, Europe, but very few are expecting the kind of growth which Ireland is currently experiencing.