The RICS is warning that the UK must look to defend its position as Europe’s top investment property market and predicts a dramatic fall in total returns in 2007.
In its most recent Global Property Survey, the RICS reports that investor and business demand is starting to pick up in rival European centres, notably Germany and Italy.
These trends reflect the fact that investment in commercial real estate worldwide is rising at its fastest pace in 18 months.
The UK currently continues to command significant interest: the RICS predicts that total returns on UK commercial property will reach 17% in 2006, despite the pressures of high oil prices and renewed competition from strengthening stock markets.
But the survey warns that in 2007 total returns in the UK could fall to 9%.
The continental European commercial property sector has also seen a rise in investor demand despite sluggish, static, or even negative rental trends.
The survey found property demand in Germany and France to be firm with rents only being held back by high levels of vacant space.
In the UK rents are picking up, primarily due to a stronger London office market which has benefited from rapid growth in the financial sector.
The emerging markets of Asia and Europe topped the growth league in business demand for commercial space in the second half of 2005.
The survey attributes this growth in Asia, notably India and China, to breakneck economic expansion, while in eastern and central Europe economic growth has followed EU membership and created high demand for offices.
According to the survey, emerging economies are also seeing the strongest rises in investment activity.
RICS chief economist, Milan Khatri, said: “Low interest rates have been the primary fuel for a surge in demand, though by the end of 2006 we are likely to see these rising across the 12-country eurozone, the USA and Japan for the first time since the late 1980s.
“With global bond yields already on the rise for these three economic blocs, some of the impetus will come out of the property market next year as foreign investor interest cools.
“As such, we believe that the tremendous returns made by investors in recent years are unlikely to be sustained in more mature property markets.”
References: EGi News 20/04/06
