IThe recovery in the European commercial property market, slow until now, is beginning to pick up speed as more countries share in the improvement in activity. But rents and capital values are still below the peak of 1989.

The occupational market is looking more favourable; rental growth is now a strong possibility. Investment yields are attractive compared to government bonds and office investment yields. The market will favour companies who have a record of active management and asset selection essential in realising real returns in the European industrial property market.

Occupational demand for industrial property is gradually improving across Europe particularly in the smaller-units segment (driven partly by owner-occupiers) and in larger distribution facilities in key locations. New construction has not been rising at a similar level to match the increase in demand. There is currently little speculative construction.

Vacancy levels are declining according to King Sturge, the average vacancy rate across Western Europe has fallen from 6.1% at the end of 2003 to 5.5% at the end of 2004. Over the same period, Central Europe’s vacancy rate has fallen from 6.6% to 4.8%. Construction activity is limited, and the development pipeline contains very few speculative projects. Given these property fundamentals and an expected pick up in the rate of business formation as economic growth improves, the outlook is for steady but positive rent growth this year.

The high income yield currently offered by industrial property will prove especially attractive in a low capital growth environment. The average investment yields for industrial property in Europe remain significantly greater than for offices, where the differential is 190 basis points higher.

Prime industrial rents in Western Europe averaged across regions are up 9% over the past five years.

Background information courtesy of King Sturge

For full report on European Industrial Property