According to analysis undertaken by research firm Real Capital Analytics (RCA), investment in Europe's commercial real estate markets slowed during Q3, marking a seasonal lull in activity following three years of strong growth and as record prices in London deterred some institutional investors.
A 14% drop in activity in the UK, the continent's largest investment market, caused a sharp slowdown on the rise in total transaction volumes in Europe from July to September. The €57.5 bln worth of completed deals recorded during Q3 was 6% higher than a year earlier, although the growth rate was more subdued than the 37% increase registered in H1, RCA's data show.
Tom Leahy, RCA's director of EMEA analytics, said: "The number of transactions pending completion suggests there will be a strong end to 2015, so we're not reading too much into a lull at the moment. Prices in Central London, which has led the rest of the European market through the cycle, are 77% above their long-term average. This suggests that for certain investment strategies we could be getting towards the end phase of the current upswing."
The quarterly drop in investment in the UK curbed volumes for the first nine months of 2015 to €67.3 bln, which is nevertheless 32% higher than the same period a year earlier. Other markets that weakened in the third quarter included Ireland and Spain. London also registered a 6% decline in transaction volumes in the third quarter to €7.97 bln. On a nine-month basis, however, the investment market British capital registered a 57% increase in activity versus 2014 with average prime net initial yields falling to the lowest recorded by RCA.
In fact, the London market has been so strong that it has allowed some investors to trade in and out of the market within the space of two years and achieve substantial cash-on-cash increases in the sale value of their assets. RCA data show that there were 22 of these asset “flip” property trades in the year ended Sept. 30, with a total transaction value of more than €1 bln. The number of assets that have traded with this short hold period in the last 18 months has now eclipsed the level seen at the height of the last boom in 2007, further emphasising the strength of the market.
One example is the Q3 sale by Ares Capital and Harel Insurance of Ten Fleet Place in the City of London financial district for approx. €263 mln (£188 mln) to Crosby Group and Wing Tai Properties. The sale price was a 66% increase over the price paid for the building when they acquired it 23 months earlier.
RCA’s Leahy commented: “The strength of the London market has triggered a sharp rise in the number of ‘flip’ trades of properties since mid-2012. London has only been surpassed by the hot markets of New York, Los Angeles and San Francisco for this kind of property trading. For a certain profile of buyer, however, London remains attractive and this is why there are still some high profile and substantial property transactions due for completion before the year-end.”
Underpinning the more modest quarterly rise in deals in Europe in Q3 was a notable increase in activity in the Netherlands, Denmark, the Czech Republic and Portugal, where transaction volumes at least doubled from a year earlier.
Falling transactions for industrial properties, residential assets, hotels and development land were offset in Q3 by a 71% increase in sales of retail properties and a 2% rise in office purchases. Swelling activity in the retail property sector was the Galeria Kaufhof portfolio purchase by Hudson Bay Co. and Simon Property Group for €2.5 bln, and Deka Immobilien’s €700 mln acquisition of the Julia portfolio of German city centre stores from D&R Invest.
City-wise, Paris rebounded from a weak first half, with a 46% increase in investment in Q3 from a year earlier to €6.68 bln. Among the substantial deals in the French capital were Gecina’s acquisition of the Ivanhoe Cambridge Paris office portfolio for €1.2 bln and France Domaine’s €484 mln purchase of the Tour Sequoia in La Défense.
RCA’s Leahy concluded: “Investor sentiment towards Europe’s real estate markets remains strong and there is plenty of capital seeking a home in property. Suggestions from the European Central Bank that it is open to more monetary stimulus to foster growth in the Eurozone will preserve low interest rates and support the investment case for real estate.”
Finally, the European Capital Trends report revealed:
- Almacantar’s €775 mln purchase of One and Two Southbank Place in London was the largest single asset transaction of the third quarter.
- The Nordic region registered a 39% increase in transaction volumes in the first nine months at €22 bln, with Starwood Capital’s purchase of the Fortin AS Norwegian portfolio for €1.2 bln the largest transaction for the year-to-date.
- Investment in logistics warehousing has eclipsed the previous peak in 2007 and is almost 50% higher.
- Middle Eastern investors, who made €7.4 bln of purchases in the first half, pared back their acquisitions to €750 mln in the third quarter as oil prices have fallen.
- Chinese investment in European commercial real estate totalled €2.8 bln in the first nine months.
Source: Real Capital Analytics
