Moody's Investors Service said last week that the industrial property markets remain rather resilient in terms of supply/demand and vacancy rates, but the supply and demand volatility ratios indicate transition risk in some markets.
These findings were published in the rating agency's update on the strength of the European industrial property markets underlying European CMBS bonds.
The results of the study show that between mid-year 2007 and mid-year 2008, the weighted average composite score for the European industrial markets remained relatively stable.
The overall supply-demand ratio across Europe remains positive, although excess demand will decrease over the next twelve months, as projected demand decreased by 0.6% compared with mid-2007.
The weighted average 12-month forecasted vacancy rate for all markets analyzed increased by 0.2% to 5.3% compared with last year. While vacancy rates in Continental Europe remained stable, they increased slightly in the U.K. (by 0.1%). Higher vacancy levels are also expected. Vacancy levels are lowest in Paris.
Overall projected construction activity is marginally down. In Continental Europe, projected construction levels indicate a minor increase of new supply to 1.8% (up 0.6%, mainly based on Paris-located projects). For the U.K., a decline of 27% is projected. Total square meters take-up in the U.K. is likely to decline by 37% by mid-2009. There is also a shift toward a negative demand level in the U.K. market, e.g. London -0.9%.
"The U.K. commercial real estate markets are facing stronger headwinds than continental European property markets, and we do not expect this trend to change," UniCredit analysts said. "Moreover, we expect the overall environment for commercial real estate markets to weaken further in the U.K. and in Europe."
They added that despite some market resilience, a macroeconomic deterioration across Europe is ahead because of the current crisis. This will also impact industrial property markets, and the CMBS sector will remain tense from a credit perspective.
Standard & Poor's highlighted a similar concern in a comment it published recently. According to the agency, there is increasing uncertainty related to commercial real estate activities in Europe, because of the worsening credit crisis and diminishing credit availability. Together, these could damage real estate values. Moreover, the threat of refinancing risk in European CMBS has been rising considerably. In 12 months, it will be a challenge to refinance CMBS without additional equity injections. Other CMBS concerns include counterparty issues, the downward rating drift of liquidity providers, and the tenant demand outlook.
Fitch Ratings last week said that, while the number of loans in payment default remains extremely low across European CMBS, the level will rise in the coming year as economies slow and corporate insolvencies increase.
However, analysts said this isn't the main cause of concern for the sector. It is the risk that borrowers will be unable to make their balloon payments at loan maturity that represents the greatest danger.
"The combination of declining property values with a restricted new lending market, means that borrowers facing loan maturity in the near future may well struggle to make expected balloon payments, at least in a timely manner," Andrew Currie, head of CMBS for EMEA at Fitch said.
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