The key European industrial property markets weakened in the first half of 2007 as a reduction in demand coincided with increasing vacancy rates, Moody’s Investors Service said in its latest Special Report on these markets.
Moody’s “Red-Yellow-Green” reports, which are published semi-annually, assess the strength of European industrial property markets that support commercial mortgage-backed securities (CMBS) transactions, based on both actual data and 12-month forecasts for movements in market supply and demand.
The objective of the analysis is to enhance transparency for investors and issuers by providing a tool for assessing the impact of supply and demand on the rental performance of the markets covered. The eight European industrial property markets analysed are scored on a scale of zero (weak) to 100 (strong) depending on the degree of stress in the rental market over a near-term horizon. These scores are described in traffic-light colours, with 0-33 identified as red, 34-66 as yellow and 67-100 as green.
Between mid-2006 and mid-2007, Moody’s weighted average score for the European industrial markets fell to 71 from 75, representing a weaker green market. In terms of individual markets, five were green, two were yellow and one was red at mid-2007.
“Several other markets have started on a transitionary path with many now showing a less healthy relationship between supply and demand,” said Rod Bowers, a Moody’s Associate Analyst and co-author of the report, which is entitled “CMBS: European Red-Yellow-Green Mid-Year 2007 Update of European Industrial Property Markets”.
“The primary reason for this change is a reduction in demand coupled with increasing vacancy rates.”
For the first time since 2003, Moody’s analysis indicates that occupier demand in the European industrial market has slowed over the past 12 months, whilst supply has slightly increased and the composite vacancy level, historically relatively stable at around 4.9%, has risen to 5.1%.
While the data collection period for the report coincided with rising interest rates and corresponding increasing costs of borrowing, the impact of these increasing financing costs is not captured by the figures presented in this report. In addition, the ‘credit crunch’, which was precipitated by defaults in the
“The higher costs of borrowing have already led to a decrease in industrial sector investment activity over the course of 2007, leading to a softening of yields on both primary and secondary properties,” advised Richard Urban, a Moody’s Associate Analyst and co-author of the report. Moreover, the increased financing costs could lead to a decline in speculative developments in the sector.”
