Take-up levels have weakened across Europe in Q3 2008, reflecting the economic slowdown. The most pronounced falls have been in London and Dublin, but Madrid and Paris have also slowed substantially. Rental levels have been mostly flat across Europe in the third quarter. However rents have started to fall sharply in the UK and Ireland. In contrast, some of the German cities have been more resilient and experienced modest rental growth. It should be noted that most lease terms in continental Europe are indexed, thus providing some support to investors. Yields are now rising in almost all locations. The sharpest increases have occurred so far in the UK and Ireland, followed by Spain and Norway.

The retail sector across continental Europe continues to perform well relative to the other sectors. Rental growth has continued, albeit at a slower pace than in 2007. Nevertheless, the slowing economy has caused consumer sentiment and retail spending growth to weaken sharply. Mid-range retailing is experiencing most difficulty, with luxury and value retailers performing more strongly so far. Development levels have been strong in a historical context for Europe as a whole, with Spain, Italy and some CEE countries experiencing particularly high levels of shopping centre completions. As with the other sectors, in 2008 investment transaction levels have fallen sharply on 2007 levels, by over 50% in most cases. Prime retail yields have been rising across Europe, but once again the sharpest rises have been in the UK and Ireland, with Spain and Norway also experiencing sharp increases in yields. So far, retail yields have risen by a smaller amount than for the office and industrial sectors.

Demand in the first half of 2008 remained healthy on a pan-European basis. Take up reached 7.3 million square metres in H1 2008, up by 10% on H1 2007, and only 6% down on the record level in H2 2007. Nevertheless, take-up levels are expected to drop back in the second half of the year.

Speculative completions remained high across Europe in H1 2008, especially in Central and Eastern Europe. However, new starts have since fallen, due to both the lack of development finance and concerns over the weakening economy. Most markets have seen no rental growth, or prime rents edge down. The best performing markets so far this year include Prague and Bratislava. The worst have been the more established markets of Dublin, London and some Benelux cities. Particularly sharp increases in yields have been experienced in the UK, Ireland and CEE.

Residential property demand has suffered in the wake of tighter lending standards applied by banks since the latter half of 2007. In the case of Spain and Ireland, price falls will be exacerbated by an overhang of stock, due to extremely high levels of home building. Price declines are evident across much of Europe, with the exception of Germany. Previously overheated markets of the UK, Spain, Ireland and Denmark have shown the largest falls in prices this year, while the Nordic region generally has suffered due to its liberal mortgage finance system being exposed to the shut-down of capital markets. The outlook is for a downswing in housing activity for the next 18-24 months, as bank lending terms will stay restrictive for some time, while housing affordability will be further strained by a weaker labour market.

Investment market
The current conditions within global capital markets are having a profound impact on European property markets. Capital values are falling, following the steep rise in the cost of borrowing and decreasing risk appetite among investors and property lenders. Since mid-2007, yields for commercial property have risen by about 50 basis points in German markets and up to 200 basis points for some locations in the UK. The UK has been quickest to respond, due to a sharp falls in yields in previous years and higher liquidity, providing more transactional evidence. Other markets that have already seen a strong yield correction include Spain, Ireland and Norway.
The level of investment activity across Europe stabilised in the third quarter compared to the second quarter. Investment transactions in Q3 amounted e26.4 billion, which is almost 60% down on the same period last year.
The current downturn in European property markets has been indiscriminate in terms of property types. Market stress is strongly related to funding and gearing. Distressed property owners are increasingly found throughout the entire property spectrum, from residential property in Germany to retail property in Central and Eastern Europe and on to central London offices. Capital values are currently falling further for secondary property rather than prime.