Focus: Building a portfolio with sound foundations

However, as a result of the credit crisis the global real estate market experienced a significant downturn in the eight months to the end of 2009. In fact, between 2007 and 2009 all property capital values fell close to 25 per cent in Europe ex UK. Commercial real estate has been particularly affected and although less severe, the trend in the European market has been similar to that seen in the UK.

Yet the worst seems to be behind us. The end of 2009 saw the UK and several Asian commercial property markets experiencing a rapid and substantial increase in capital values, with falling yields reflecting the improved economic backdrop and attractive returns compared with other asset classes. More recently, the start of similar dynamics in some prime commercial European real estate markets have become apparent.

Yields in the more mature and liquid continental markets of France and Germany, for example, have again started to compress. Subsequently, it is now time to be considering investing in continental European real estate again, within which the commercial sector looks particularly attractive. The reasons for this view are numerous. Some are cyclical factors related to current market conditions, others are long-established and structural in nature.

The European economy is being adversely affected by the southern European debt crisis, but in terms of economic growth it is in an improved position overall compared with this time last year. Whereas the economy shrank by 4 per cent in 2009, it is expected to grow by 0.9 per cent this year.

Although the commercial continental European real estate market is generally not as liquid or transparent as that of the UK, it includes some of the deepest and most established property markets in the world.

According to DTZ – a global real estate adviser operating across Europe, Middle East and Africa (Emea), Asia Pacific and the Americas – at the end of 2008, the total invested stock in Germany stood at similar levels to that of the UK. On an index of liquidity, where the City market has a liquidity index level of 100, both the Paris and Stockholm markets have levels in excess of 80. Although the correction in commercial property markets is not expected to be as strong as that in the UK, from a cyclical standpoint there are a number of reasons why continental Europe is likely to benefit from a substantial increase in capital values in the coming months.

Most prime continental European commercial real estate markets have reached – or passed – the bottom of the investment cycle. In Europe’s most important office and retail markets such as Germany, France and the Benelux countries, yields fell slightly in both the first and second quarter of this year and were static in most other centres.

The yield on prime continental European commercial real estate has this year been higher than that offered by most other asset classes. According to property advisers CB Richard Ellis, net initial yields on EU-15 (countries that were members of the EU before the accession of 10 candidate countries on May 1 2004) prime offices stood at 5.7 per cent at the end of March, while the German Dax equity index yielded 3.3 per cent and German 10-year government bonds yielded 3.1 per cent.