CB Richard Ellis Group, Inc. (CBRE) announced a slight upturn in the European commercial real estate investment market, with turnover for the second quarter (Q2) of 2009 totaling 13 billion, a 12% increase on the 11.6 billion transacted in Q1 2009. The increase in activity was heavily weighted towards the last few weeks of the quarter.
This increase in activity has been matched by stabilising yields. The CB Richard Ellis EU-15 all-property average prime yield rose by just 2 bps in Q2 to 6.13% - a significant change from the recent trend that had seen the average yield increase by 103 bps over the previous four quarters. Of particular note was the fall in the average office yield (albeit by just 2 bps) as a result of tightening yields in Paris and provincial UK markets.
Although the upturn in pan-European investment activity in the second quarter is relatively modest, the results are an indication of improving investor sentiment. The question is now whether the recovery in activity seen in Q2 will be sustained. Even if investor interest remains high, transactions are often taking considerable time to complete and the summer period in July and August is traditionally quieter from an investment perspective. This may mean that the improvement in activity levels will not become fully apparent in terms of completed deals until the last three or four months of the year.
For Q2, there were mixed trends across different European real estate markets, with a more pronounced renewal of investor interest in markets that have already seen the greatest price correction, such as London, Madrid, Barcelona and Paris. The UK trend is particularly notable. After a relatively slow start through April and May, the property investment market picked up strongly in June, with the final month of the quarter accounting for more than 60% of the Q2 2009 total. Five of the six 100+ million deals that took place in the UK were concluded in June, including the largest single asset deal the £458 (510) million purchase of 1-10 Bishops Square by Oman Investment Fund.
Total investment turnover in commercial real estate in Central and Eastern Europe (CEE) totalled approximately 560 million in the first half (H1) of 2009, according to CBRE's report. This total was down 86% from volumes seen in H2 2008 and down 91% compared with H1 2008.
CEE H1 investment activity was concentrated in Russia (249 million) and the core Central European (CE) markets of Poland (114 million) and the Czech Republic (73 million). As a result, turnover in these three countries accounted for almost 78% of CEE's H1 2009 investment volume, compared to 65% in H1 2008. "Equity investors continue to seek prime property in core Central European markets however the amount of available core product in Central Europe is limited and agreement on pricing is continues to prove challenging" commented Tim O'Sullivan, Head of Capital Markets at CBRE Hungary.
There are a broad range of investors currently active across Europe. Recent buyers have included institutions, Sovereign Wealth Funds and German Open-ended Funds, as well as private investors and Opportunity Funds. The entry of Opportunity Funds to the market, who have been sitting on the sidelines since mid-2008, is a positive development. Market activity is expected to increase in CEE in the second half of 2009. This expectation is based on continuing interest from active equity buyers; the expected reopening of several (currently) closed German Open-ended Funds, and increased interest from local buyers. In several markets across CEE there are already signs of growing activity.
Michael Haddock, Director of EMEA Capital Markets Research for CB Richard Ellis, said: "What the second quarter's activity clearly reflects is that those markets that have seen greatest price corrections are seeing most transaction activity. This is particularly true of Spain and the UK, where investors have been attracted to the markets by a perception that they now offer good value."
Jonathan Hull, Executive Director of EMEA Ca