Direct investment into commercial real estate in Europe for 2008 will likely come in between 105 and 110 billion, according to latest research from Jones Lang LaSalle. This figure is down some 55% on volumes recorded for full year 2007 although this was partially due to a decline in capital values and volatile FX rates.
Investment activity had already slowed in the first half of 2008, but since the collapse of Lehman Brothers in September, investment activity reduced further. In quarter four, which is traditionally the strongest quarter of the year, an estimated 16 billion of direct real estate transactions was recorded in Europe. This is a 30% fall in transaction volumes from the previous quarter.
Tony Horrell, Head of Capital Markets at Jones Lang LaSalle, said: "The volumes in 2008 are no surprise to those close to the market given the situation in global financial markets, the wider economic slowdown and investor confidence levels. Although we believe that we are through the worst, investment activity will remain low in the early part of next year."
"Significant changes to global debt markets have fundamentally altered the dynamics of direct real estate investment. Through 2008 we saw a reduction in activity from all types of investors including institutional investors and listed property companies, German Open Ended funds together with a more cautious attitude from both international wealth capital and private equity inventors."
The impact of falling investment volumes has been Europe-wide, but most pronounced in the UK, Germany and France, where volumes fell by 60% to around 60 billion. However, different markets react at different speeds. So far the slowdown in activity has been evident mainly in mature Western European countries, despite the fact that some smaller markets in the west have kept relatively stable levels thanks to a few large portfolio deals completed earlier in the year. In Central and Eastern Europe (CEE) restricted investment stock and the suspension of investment activity by some of the Germen Open Ended Funds has led to a slow down in investment activity, particularly in the second half of the year. Despite this CEE's overall proportion of total European transaction volumes increased from 4% to 8% in 2008 compared to the previous year.
Cross border investment, which for eight consecutive years of increasing share of activity against domestic investment, saw its percentage of total activity reduce slightly for the first time during 2008 as a whole from 63% to 60%.
Tony Horrell added: "In today's market, we are seeing a flight to quality and more attention focused on property fundamentals and future tenant demand. The recent correction in pricing is already proving encouraging to some opportunistic investors and equity rich players. However, to boost transaction volumes dramatically will require liquidity to increase in the debt markets."
He concluded: "In 2009, we expect some highly geared investments to come to the market as banks repair their balance sheets. As a result of quite significant falls in the capital values that we have already seen, markets have moved closer to fair value and will create some excellent buying opportunities in the coming year. The opportunity to acquire quality stock at reasonably acceptable price levels is already beginning to act as a catalyst in some markets."
Source: Jones Lang LaSalle
