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Commercial property prices prone to spike

“Make the most of this opportunity to invest because it will be short-lived” says Angus McIntosh, Head of Research at King Sturge in a press release issued by the property consultant.

“In 6 months’ time, we predict that the price of prime commercial assets in the key European markets will be rising again, following the trend already set by London. By spring 2010 investors who haven’t made a purchase will have missed the bottom of the market.”

Against a backdrop of weak demand for office space, rising availability and falling rents, prime London office space has been the target of investors since the beginning of 2009.

“London is clearly at the centre of many investors' focus since sourcing prime assets on the continent is still relatively difficult” says Chris Gore, King Sturge, London City Investment. “Sterling's relative weakness helps the UK but investors only consider prime assets with security of income; the order of the day is wealth preservation rather than wealth creation.”

There are signs that H1 2009 may be the low-point of the current cycle and London may be one of the markets at the forefront of the revival, although further downturns are still expected at least until the end of the year, with those office markets most open to international influences seeing the greatest changes.

“The Budapest office market in the last 12-18 months has seen quite the change, thankfully we did not see the rental spikes as in other markets, therefore the impact on headline rents has not been so harsh,” said Ward Stocker, partner in the Budapest office of King Sturge. “It is tough times for all, but landlords can maximize value by approaching tenants and encouraging them to extend lease terms for rental decreases and incentives. Tenants are staying in existing buildings, providing the landlord is reasonable. In terms of the investment market the door is opening and we are seeing an increase in interest, but this still needs to transact into investment deals.”

London’s occupational market has been severely affected with take-up down 40%. This has led to increased Landlord flexibility and beneficial rental agreements. Such trends have seen investors 'shopping' in London, with money being seen from Germany, Asia and the Middle East.

“With risk appetite returning and improving economic news on the Continent, conditions are now in place for the investment upturn to broaden” adds Andrew Burrell, Research Partner, King Sturge. “Recovery will be slow at first, but revival across Europe is in prospect over the next 12 months. Occupier markets, however, will lag the economic upswing.”

In Western Europe, the most significant downturns are expected in those cities most open to international influences, notably Amsterdam with a drop in demand of 42%, Paris (-28%), Brussels (-26%), and Frankfurt (-13%).

Demand in the CEE has followed a slightly different profile but Prague, Budapest and Warsaw are among the worst affected with all three cities expecting take-up to be down by about a half in 2009.

Employment is set to decline in most European economies over the short to medium term and office jobs are not immune to the slowdown. Employment forecasts provide some reassurance about the prospects for office demand. After 2010, conditions are expected to improve, slowly at first, but steadily. Although recent growth peaks are not rescaled, office jobs are predicted to drive employment again in the early 2010s, according to the latest forecasts.

London features strongly, boosted by its global catchment, buoyant demographics and the solid UK economy. Munich and Milan also see rapid job growth, despite relatively poor national economic performance, as do traditional business centers such as Amsterdam and Frankfurt. (press release)