New Horizons

Property market returns will weaken in 2008 and 2009 across Europe, with rental growth decelerating as the economic slowdown gathers pace. Capital values will also decline, particularly in locations where yields had fallen to extremely low levels. Nevertheless, the correction has already been rapid in markets such as the UK, and yields in such locations will rise to levels that could prove attractive to investors in 2009.



THE ECONOMY

Overview
The US sub-prime mortgage market crisis has turned into a full scale banking panic, prompted by the failure of Lehman Brothers. Credit market stress is the highest since the 1930s in the US, and the post-war period in the case of Germany. The crisis has jolted European governments into unprecedented banking sector capital injections, in an attempt to boost confidence and restart lending in the capital markets. Moreover, a number of central banks in Europe joined in a co-ordinated global move to cut interest rates by 50 basis points in October and further large moves are expected in the year ahead. Reduced risk taking though has forced Hungary and Denmark to raise interest rates to support their respective currencies.

European GDP in Q2 showed the first material drop since 1993 as consumer spending came under pressure from higher food and oil prices. Recent falls in commodity prices will provide relief to consumers, but this will not fully offset the damaging impact of markedly tighter bank lending conditions for households and companies. By Q3, inflation pressures had started to ease across the region from relatively high levels but at the same time unemployment rates had started to edge higher, especially in the UK and Spain, and consumer confidence has slumped.

Outlook
The eurozone economy will slow in 2009 to the weakest pace of growth since the early 1990s, hit by weakening global demand. Where housing booms are in the process of unwinding, such as the UK, Ireland and Spain, we see greatest risks of a recession in the next year. Compared to the Anglo-Saxon economies, the eurozone and the Nordics are in better shape due to a lack of external imbalances or high indebtedness on the part of households, although notable exceptions to this include Ireland, Spain and Denmark. Much lower interest rates and substantial support for the banking system should form the basis for a return of liquidity to the financial markets in 2009. Financial institutions will grapple for sometime with impaired capital markets and new problem loans; though a modest improvement in European activity is expected by the latter half of next year and into 2010. The risk for emerging Europe is for a sharper and prolonged slowdown due to its reliance upon foreign capital inflows to sustain growth, and has already led to the IMF providing support to Hungary and the Ukraine.

RECENT PROPERTY MARKET TRENDS

Offices
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.

Retail
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.

Industrial
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
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.

Outlook

With the real economy now starting to feel the impact from the financial crisis, occupier demand is softening. A fall in demand is expected for at least another 12 months, being most pronounced in the office sector. Demand for retail space is expected to be most resilient, as in previous downturns, and especially in the non-cyclical food sector. Demand for logistics space is expected to stay at relatively good levels, as much of demand stems from ongoing rationalisation in global supply chains and cost cutting. However, logistics demand will not be immune to slowing world trade growth. The only sector actually benefiting from the current environment is the rented housing sector, where demand is increasing, due to capital falls, mounting uncertainties in the owner-occupier market and the increased difficulty in obtaining mortgage financing.

There is uncertainty as to how long the financial crisis is expected to persist. As debt securitisation markets are likely to stay closed in the foreseeable future, property lending is likely to become more traditional again, with banks being more cautious, requiring higher compensation for risk that sits longer in their books. Yield spreads over risk-free rates are expected to return to levels witnessed before the recent boom in property debt securitisation.

There are also some promising signs. Governments in Europe are now determined to restore confidence among financial institutions and consumers, which should eventually enhance liquidity in property lending markets. Another positive development is the drop in expected development activity. Higher financing and construction costs, coupled with weaker tenant demand, are cutting the new construction pipeline quite dramatically. This will allow rental growth to recover again once economic fundamentals start to improve. For the next 12 months, property investors are advised to remain cautious as further capital falls are anticipated. However, as the process of price correction progresses, property investors should become more alert to opportunities. UK property prices have already become more attractive, with yields now being higher than in many other markets on the continent. Other markets, where prices are correcting quickly, now include Paris, Madrid, Oslo, Dublin and some markets in CEE. More frequent forced sales may offer attractive buying opportunities, especially for equity investors.

Lastly, we would advise investors to focus more on market fundamentals. Countries that have sound financial fundamentals, for instance, those with high savings ratios, balanced current accounts and limited public and private debt, are likely to recover first. Property market fundamentals will also gain the importance they deserve. Demand factors, such as population growth, economic growth, structural changes in the economy and supply factors such as land availability and zoning constraints, will become more decisive. The quality of active asset management will also play an important part going forward. With the era of windfall profits by yield compression now over, pro-active managers possessing property management capabilities are expected to outperform.

Important Information
For professional use only
This document is strictly for information purposes only and should not under any circumstances be considered as an offer or solicitation to deal in the property market. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader acting on any information, opinion or estimate contained in this document. The information contained herein, including any expressions of opinion or forecast have been obtained from or based upon sources believed by us to be reliable, but is not guaranteed as to accuracy, adequacy or completeness.
Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and actual events or results may differ materially. Any research or analysis used in the preparation of this document has been procured by the company for its own use and may have been acted on for its own purpose. Aberdeen Property Investors does not accept responsibility for any loss arising from the use hereof. The value of investments and any income from them may go down as well as up; they can be affected by exchange rate movements between currencies and it is possible that investors may not get back the full amount invested. Past performance is no guarantee of future performance. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of Aberdeen Property Investors. Issued and approved by Aberdeen Property Investors UK Limited which is authorised and regulated in the UK by the Financial Services Authority.
© 2008 Aberdeen Property Investors. All rights reserved.

Megacities – cities with more than 5 Mio. inhabitants – are new phenomena of worldwide urbanisation processes. They are results of globalisation and are subject to global ecological, socio-econo¬mical, and political change. Reciprocally, they also dictate these changes due to their strong developmental dynamics. New are not only the up to now unknown dimensions of the quantitative enlargement, the high concentration of population, infrastructure, economic power, capital, and decisions, as well as the exces¬sive and partially self-energising acceleration of all the development processes, but above all also the simultaneousness and overlapping of the different processes with mutual feedback. Increasingly, megacities are subject to an up to now unknown loss of governability and control – with the consequence that more and more processes are unregulated and take place infor¬mally. They are driven and shaped by manifold decisions of numerous urban actors, from administration to non-governmental agencies, from transnational corporations to civil society.

Megacities have developed into new forms of socio-economical and political urban entities, they are “laboratories of the future“, because they reflect glo¬bal development trends compactly. Therefore, it is not the mega-urban development per se, but rather the dynamics, complexity and multi-actor dependency of the fundamental processes as well as their economical, social, and spatial effects, which form one of the greatest challenges of our time.

Too often, megacities are perceived mainly as burdened by numerous disadvantages, origins and motors of multiple problems as well as agents and victims of risks. Such a view does, however, neglect numerous – at least potential – benefits, chances and advantages of mega-urban developments. Consequently, in a more balanced perception megacities possess a so-called double-headed face:

• On the one hand, megacities are global risk areas - in natural and human dimensions. They are subject to increasing socio-economic vulnerability due to increasing poverty, socio-spatial and political-institutional fragmen¬tation and often extreme forms of segregation, disparities, and conflicts. Megaurban societies are disintegrated and destabilised due to the direct proximity of very different local livelihoods and lifestyles (including ethnic and social groups). Megacities not only face risks in consequence of external events, whether natural or manmade. They likewise contain, produce and reinforce hazards and as such are "victim and culprit" at the same time.

• On the other hand, megacities, as global junctions, offer a multitude of potentials for global transformation. Due to their wide range of available human resources and globally linked actors, megacities are considered to be potential “innovative milieus“. For example, improved sustainability can be achieved by decreasing the "drain on land resources", by using resources very efficiently (recycling and regeneration), efficient hazard prevention, and sufficient health care.

The general perception of mega-urban regions, the international megacity research as well as the priorities in planning and governance need substantial changes. On different levels the following shifts in prioritisation deem to be important:

1. Megacities should more being perceived as areas of global importance, affected by and affecting themselves manifold levels of global change over wide distances and long periods of time. Consequently, their performance falls no longer just in the responsibility of local actors, but as they are embedded at least in transnational, if not global development processes the responsibility for their sustainable development lays in the hands of numerous, more or less directly or indirectly responsible, internationally connected actors.



2. The comprehension of the “double-headed face” of mega-urbanisation demands that the general perception of megacities should shift from a predominantly negative view (“moloch”, “global sink”) to a more positive perception of mega-urban areas as priority areas and drivers of change, with at least often undiscovered potential of improved sustainability and quality of life for many, at least more, if not all inhabitants. Megacities are key areas of sustainable urban development worldwide.



3. The complex reality of phenomena, processes and actors as well as the high pace of development in mega-urban areas inevitably demand international, inter- and transdisciplinary, intercultural as well as multi-stakeholder-oriented action – including stakeholders from research, administration, the private sector and the general public and civil society. The high dynamics of urban land markets and the increasing relevance of private land developers make them important stake holders in negotiation processes of urban governance. This necessarily implies a more engaged and committed interaction among all responsible levels.



4. As to the role and direction of research, the generation of not only knowledge based on fundamental descriptions, analyses and explanations but, moreover, the creation of knowledge for prediction, orientation and decision-making is deemed indispensable.



5. For many megacities, particularly in the developing countries, major shifts from a predominantly globalisation-driven, competitiveness-seeking top-down development to alternative priorities are regarded important. These include the turn to three key components: Beyond current priorities on structure-, pattern-, landuse-, infrastructure- and housing-based planning more problem-, process- and people-oriented approaches are needed.

George Dutchev is the Editor-In-Chief of Property Xpress, an online service providing daily news on South East Europe, Ukraine and Russia.



Despite being close to each other, Balkan countries have a number of differences in terms of tourism development and perspectives. From the well-developed Greece and Turkey, to emerging Bulgaria, Croatia and Romania to the “rising stars” Montenegro and Albania, forces driving the development of each of these markets are all different, varying from sunny coastlines and snowy mountains to business trips.

Besides the mature markets of Greece and Turkey, where trends in tourism have been established for years, today, the tourist destination picture is ‘multi-colored’, due to political and economic processes. New EU members Bulgaria and Romania make the most from both their picturesque scenery and increasing number of business travelers. After separating from the Former Yugoslavia, Croatia and Montenegro appeared as attractive destinations with a number of large-scale tourism projects – some under construction and some still in the pipeline.

Despite positive signs, the main question for Balkans tourism, as everywhere in the world is; will the international slump hit the market… or will the market defeat it?

In recent years, Romania registered a stable increase in the number of foreign visitors arriving in the country. Figures from market research showed a 28 pct increase for 2007, up from six mln in 2006 to 7.7 mln in the next year. According to the World Travel & Tourism Council in 2008, Direct Industry GDP will be 8.1 pct and the tourism share in GDP will reach 2.2 pct or 3.6 billion dollars (2.9 billion Euro). (2006) Most foreigners travelling to Romania are on business, but it is expected that a greater number will come for leisure in the future, as Romania has significant leisure potential.

In a likely scenario, the international slump could bring some positives to Bulgaria, according to Roumen Draganov, Director of the Bulgarian Institute of Analyses and Assessments of Tourism. This year’s figures show that visitors coming to the country have increased by 17 pct to 5.8 mln. (end of August) compared to 8,2 pct growth for the whole 2007. Why? Because until recently, Bulgaria has been known as a budget destination, attracting mid to low-yield tourists, not expected to be affected by the crunch unlike high-yield tourists. On the other side, the tourism boom in the recent years resulted in the development of hundreds of hotels, some of which now suffer from saturation in the sector. Where are the niches? Roumen Draganov says, there are niches in spa and health with relevant preliminary feasibility study as well as in the hotels, built in big cities but only under the umbrella of a recognized international chain.

The government in Serbia has accepted a plan through which 2.8 bln. euro will be invested in tourism until 2015. Money will be spent to develop the tourist area in the Serbian part of Balkan Mountain as well as for development of a tourist complex around Lake Palich. In recent years, Serbian tourism has showed encouraging results. For instance, in 2007, 690,000 tourists visited the country; a 48 pct increase compared to the previous year. Hotels in the big cities recorded 30 pct increase or 348 mln euro in 2007. In 2008, there was a successful privatization, leading to revitalizing 310 hotels with more than 112,000 beds.

The hospitality industry in Croatia has shown strong figures in early 2008. In the period January to February 2008, the number of tourist nights totaled around 730,000 (domestic and foreign), up a strong 13% y-o-y, according to a report by Business Monitor International. The top four foreign markets, Germany, Italy, Slovenia and the Czech Republic, all recorded strong growth. However, due to the slowing in the global economy for 2008-2009, there are some signs that this will affect Croatia through lower growth in tourism revenues. Growth is nevertheless expected to rebound strongly in 2011-2012 with the expected EU accession.

Export earnings from international visitors and tourism goods in Montenegro are expected to generate 37.9% of total exports (EUR529.9 mln) in 2008, growing (nominal terms) to EUR 1,887.4 mln (46.8% of total) in 2018. Real GDP growth for travel & tourism economy is expected to be 17.0% in 2008 and to average 5.6% per annum over the coming 10 years. However, rising prices are contributing to a slowdown in Montenegro’s tourism boom, Balkan insight reports. The head of the Tourist Agencies Association in the coastal town of Budva said, quoted by Balkan insight, the “first problem was the 20-30 percent price increase in June in both hotel and private accommodation compared to last year.”

Peter Vesenjak, CEO of Hosting d.o.o.(ltd.), Ljubljana (Hosting d.o.o. (ltd.) represents a group of companies located in Slovenia, Croatia and Serbia, www.hosting.si )



Western Balkans is a European region situated between western, central, eastern and southern Europe which means that it is positioned closest to the main European markets and is rich with tremendous and very attractive natural (Adriatic sea, Mountainous areas, many thermal healing water sources, excellent wine regions, etc.) and historic (Old historical cities, e.g. Dubrovnik, museums, etc.) resources, favorable climate (mixture of continental and Mediterranean climate) and fast and easy traffic access.

Western Balkans economic growth in past 5 years has been marked as one of the highest and most stabile in Europe. The comparison of the absolute numbers of economic development and the potential for further growth (rich resources, positive political changes, opening of the countries for foreign investment, etc.) show that the potential for growth is still high in near and long term future. This is why the level of growth in western Balkans countries show further tendency of growth, above the level of most of the western countries despite the global financial markets crisis.

Data for GDP and GDP per capita – Western Balkans Countries

Source: CIA World Factbook 2008

The level of foreign investment and especially FDI in past years was still rather low in comparison to the above mentioned potentials and resources of the western Balkans countries and in comparison to the other e.g. eastern European emerging markets. This was mostly due to the perceived image of the region by the international capital markets after the 90s rough political changes. It is to be stressed that the western Balkans countries with the latest political changes and developments are becoming stabile and future oriented countries, very much open for foreign investment (with all the countries of the Western Balkans the EU has established a process – known as the Stabilization and Association process - which aims to bring them progressively closer to the EU. Thanks to this process, these countries already enjoy free access to that of the EU single market for practically all their exports, as well as EU financial support for their reform efforts.).

Tourism investment and real estate investment opportunities are one of the most attractive potentials in the region, due to the most attractive natural and historical resources, internationally traditionally already well recognized tourism destinations (Dubrovnik, Montenegro, etc.), fast developing infrastructure and general economic growth generating international business clientele. At the same time underdeveloped tourism capacities as by the quantity and as well the quality demanded by the international tourism market, grows the need of the western Balkans countries to open to the international foreign investment to comply with the demand for growth in future.

All western Balkans regions altogether in 2007 generated 11,7 million tourist arrivals and 12,3 billion USD of foreign currency income, which is way under the real potential of the region. Most of the existing tourism capacities (Hotels, etc), except those developed and reconstructed in the last 10 years, which were developed mostly in 70s and 80s, are seldom meeting the standards and demands for its turning to the modern and successful tourism facilities so the experience show that the international investors do a better job if they develop a new Greenfield investment or at least achieve a total reconstruction and/or enlargement of the existing facility to be able to design and technologically meet all the necessary standards for future years of tourism. Investors did meet problems in urban planning efficiency by the public sector in some sub regions of the western Balkans in the past, but the experiences are very different in different countries, sub regions or even municipalities so investors should primarily check for these before they start the development.

Attractive developments can be made on the Adriatic coast in Croatia and Montenegro and in the near hinterland (also B&H) where there is still place for Greenfield investments related to the Mediterranean climate and vicinity of the sea. Due to the international socio-demographic trends and need of the population in entire European market also spa resorts, for which the western Balkans is very rich of resources, are great potential for investment development. Cities, especially the capitals and even smaller but historically important and attractive cities can be great opportunity for investment in hospitality related facilities for meeting growing demand of business, transient and city touring clientele discovering (again) the region.

All these grounds put the western Balkans countries on the market as one of the rare opportunities for potential for stabile and growing investments in coming years as well as long term positive perspective.

The most recent economic analyses have pointed Brazil as the main BRIC. In short, Brazil has more possibilities for responsible opportunities than Russia, India and China.

In addition to having controlled inflation and stabilizing its macro-economy, there is political freedom in Brazil, and the political risks are less. The interferences in the right to property have been identified and are being dealt with by society. Analysts argue that Russia and China still suffer from strong governmental controls over the right to private property; in India, though a democratic society, there is an important religious and intellectual class that supports the idea that the government should interfere in a number of private activities. They also say that the interest of foreigners in a second residence in China is small, and this is actually forbidden in India. On the other hand Brazil, like the US and Spain, is open to such investments.

In addition, the number of home owners has increased in Brazil. With an increase in real income and an improvement in the economy, the purchase of real estate and the consumption of other goods have also grown. After years of working at low capacity, the real estate industry has persuaded the government to define more appropriate legislation in the sector for the present internal economic situation. With solid regulations and legal security, accessible real estate credit is once more being offered to Brazilian citizens.

But although the economic and productive scenario in Brazil is totally different to that of the last twenty years, there is still a huge lack of housing in Brazil. There is a shortage of eight million dwellings for a population which lacks finance. It is necessary that the government change its traditional policy and guarantee these families access to the greatest good a human being can have: a dignified home.

In spite of this, there is no lack of optimism. We believe that in the same way that it has been possible to change a negative situation through responsible policies, with which it was possible to take advantage of a good moment internationally and place Brazil on the road to development, a way will be found to end this social blemish.

The productive sector, the government and society are now aware that Brazil cannot turn back from the path toward growth and that there is no more possibility of a return to inflation. The principle of democracy has now been consolidated, and no other government model can be imagined. Even when faced with the North-American financial crisis, which has brought changes to stock exchanges throughout the world, Brazil’s bases have stayed firm. It has to be remembered that the stocks of the corporations and construction companies listed on the São Paulo Bovespa Stock Exchange fell sharply from 2005 to 2007 accompanying world trends. But this little reflects what is actually taking place inside the companies.

One should not relate the financial health of the Brazilian real estate companies to the swings in the price of shares, but one should have faith in a solid economy and a balanced and serious real estate market which is growing. This certainty makes us believe that Brazil really does have a special place among the emerging economies of the world.

João Crestana, President of Secovi, São Paulo state, is Rector of Secovi University