Jones Lang LaSalle's update on the direct European commercial real estate investment market, released today at Expo Real, shows that direct investment in commercial property in Europe increased in Q3 2009 to 18 billion, a 40% increase quarter on quarter (12.9 bln. in Q2 2009).
Tony Horrell, Head of European Capital Markets at Jones Lang LaSalle said: "This is the second consecutive quarter of increasing transaction volumes and we believe that we have now seen the lowest quarterly volumes that we will experience in this downturn (in Q1 2009). We expect volumes in Q4 2009 to be the strongest quarter of the year, and for full year volumes to reach in excess of 60 billion. Despite the increase in transactional activity, we expect year end volumes to be down 45% on 2008, which in turn was down 55% on 2007."
Horrell continued: "As we moved through the summer period sentiment surrounding the market improved markedly and today there are clear signs of new found confidence in some European markets. Sentiment clearly has the ability to move markets (and often to trump fundamentals) and at the moment, sentiment is one of the key drivers of the increase in transactional interest and activity, which is evident in all sectors and most markets."
Investor interest remains focused mainly on prime, secure income producing product and the market remains segmented into these very prime assets and everything else. Active investors also have a clear preference for the deeper, transparent markets of Western Europe together with those markets where prices have fallen the furthestby up to 50% in some cases. The result of this is that markets across Europe are now experiencing different levels of investor attention and are facing very different prospects. This is leading to a more dislocated European investment market than we have seen for some time.
Some markets, such as London, are currently flooded with equity, often from high net worth individuals. Institutions are seeing positive inflows again for their retail funds as the fear which had gripped investors begins to subside. German open ended funds have also seen positive inflows and as a group they remain active across the region. European REITs have recapitalized through a combination of rights issues and asset sales; they are now in a stronger position and are looking at re-entering the market as buyers. There is growing recognition that the best opportunities are typically secured before markets begin to recover, as once there are clear signs of a recovery vendors will try to hold onto assets for longer. However, equity raising for direct investment funds remains slow and there is little appetite for value-add direct investment. Having said this some opportunistic investors are focussing on distressed debt opportunities.
Cross Border Investment Flows
Cross border investment continues to gather momentum and overall is growing at a faster pace than domestic investment. Some markets such as Germany, Sweden and Russia remain largely domestic focussed, whilst UK, Spain and France recorded significant cross border investment interest in Q3 compared with Q1 of this year.
We have observed some easing of credit availability, particularly credit for new purchases of prime buildings. However, criteria for these loans remain tight and assessment processes are stringent. The outcome of this easing is an increase in the number of larger deals with average lot sizes starting to trend higher. However, a full recovery in the market, including investment in value-add opportunities and developments, will be dependant on the recapitalisation of the sector, including both banks' balance sheets and CMBS.
A lack of quality product on the market will mean a significant amount of capital will remain frustrated. Few owners can crystallise a profit by selling at today's values; banks will work through their loan books gradually and have already shown they will not flood the market with assets; some recovery fund