International players have dominated Europe’s peripheral investment markets in H1 2013 accounting for almost 60% of transactional activity in Italy, Spain and Ireland compared to 40% in 2012 according to the latest research by Savills.
According to Savills, this is evidence of growing investor confidence as the economic outlook improves with buyers that are prepared to move up the risk curve increasingly looking into these markets pushing up overall investment volumes. These volumes have risen year-on-year by 10% in Italy, 51% in Spain and over 300% in Ireland in H1 2013 with activity expected to rise further in the second half of the year.
The firm states that the improved share of cross border investment is supported by a rising influx of international funds into Europe including sovereign wealth funds from the Middle East, international pension funds, new German investors and opportunistic funds seeking opportunities in different European sectors to diversify their real estate portfolios.
Eri Mitsostergiou, Savills European Research Director, says: “Cross border investors are increasingly looking for opportunities in peripheral markets where re-pricing offers attractive income return potential and better prospects for yield compression as the economic outlook gradually improves.”
Overall in the first half of the year the total commercial investment volume in the 12 countries surveyed by Savills reached just under €50 billion. This represents a 3% increase year-on-year (but -25% compared to H2 12) with the top three markets of the UK, Germany and France accounting for 76% of this volume, down from 78% in 2012*.
The report shows that the majority of buyers active in the region are still chasing prime opportunities across all market segments however a lack of core assets has resulted in signs of a shift towards value-add and opportunistic investment types, a trend which Savills believes will attract further attention to the regional and peripheral markets of Europe. The scarcity of prime shopping centers has resulted in reduced retail volumes (-11% y-o-y) whilst industrial investment increased by 22% across the region. Offices remain the preferred asset type accounting for 51% of investments in H113 (RCA data).
Marcus Lemli, Savills Head of European Investment, says: “The pricing of prime product on the one hand and the desire for higher returns paired with an increased appetite for risk is in some cases shifting investor focus towards regional markets particularly in the UK, Germany, Poland and the Netherlands. Going forward we expect the high number of deals currently in negotiation stages should lead to an improved output in the second half of 2013 compared to H1 and anticipate the year end investment turnover figure to be in line with or just below the 2012 total of approx. €110 bln.”
In terms of yields, the difference between prime yields in core and peripheral markets has started narrowing mainly led by yield compression in Ireland where prime yields have moved in by 200bps over the last twelve months (prime CBD offices). The average yield in the surveyed area stands at 5.3% for prime CBD offices, at 5.9% for prime shopping centers and 7.5% for prime logistics sheds. Looking ahead, overall prime yield levels are expected to remain stable across the region with the significant exception of Ireland where Savills anticipates a further hardening of prime yields to 6.0% by year end.