C&W: European commercial property investment – Second quarter update (EU)

No summer pause yet for European real estate markets

• Volumes post best second quarter rise for 5years

• Interest spreading to new markets as risk tolerance grows and prices rise.

• Offices leading over the quarter

• Strong second half in prospect to deliver year-end total of €142 bn

Despite jitters in global stock and bond markets, demand and activity remained high in Europe’s commercial property market in the second quarter. Trading activity in fact hit €32 bn for the three month period, the strongest second quarter we have seen since 2007, as investors expanded their buying horizons, took on more risk and pushed up pricing in the process.

Activity was 4% down on the opening quarter but year on year volumes rose 8.6%, with foreign buyers crucial in most areas as they boosted spending by 15% versus a 5% rise in domestic activity.

Larger lots are most in demand among the global pension, insurance and sovereign wealth funds who are driving the market and the big 3 of France, Germany and the UK continue to dominate activity overall, taking 62% of all monies invested in the quarter.

However their market share has slipped as a wide range of other locations have come to the fore, with southern Europe up 94% on the quarter, Benelux up by 70% and the Nordics by 30%.

Reviewing the figures, Jan Willem Bastijn, Head of Capital Markets at Cushman & Wakefield, EMEA said: “Many investors are still heavily focused on core markets but more and more are looking further afield for opportunities, with Central & Eastern Europe strong in the first quarter for example but some of the distressed Club Med markets bouncing back in the last quarter, led in particular by some notable office deals.”

“With more equity buyers coming into the market and debt somewhat easier to obtain, this is only likely to accelerate after the summer and we’re now forecasting a year-end trading volume up 5% at €142bn versus our estimate of €136bn made at the start of the year” concluded Bastijn.

Over the year it has been retail and industrial most responsible for the growth in activity, rising by 14% and 13% respectively, but this is changing, with offices having the best of the last quarter and seeing volumes ahead by 4% quarter on quarter to €15.1bn, 47% of the market.

David Hutchings, Head of European Research at Cushman & Wakefield, said “The rise in long term interest rates which is preoccupying global markets may be inevitable but it is not yet imminent and investors need to remember that ultra-low interest rates will be with us for some time yet.”

“While property values stabilized in the opening months of the year, pressure is now mounting for prime property yields to fall. In the medium term this will be justified by the lack of recent development which is sure to underpin an eventual return of rental growth as occupiers grow in confidence but you don’t need to buy into the economic recovery story to understand the charms of property. Indeed, with average prime yields of 6.5% to 7%, real estate is being targeted with the understanding that it is income and income sustainability which will drive short term performance while inflation hedging will help in the medium term” said Hutchings.

Source: Cushman & Wakefield

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