Renewed cross-border activity in 2012 has highlighted a number of growing trends in Europe. Marcus Lemli explains
Over the past 12 months we have observed that Europe is very much back on the global cross-border investor’s radar. Interest in European commercial real estate is not only coming from the continent, but further afield with investors from Asia, the Middle East and the US, in particular, expanding their requirements as the EU economy begins to look brighter. We expect these buyers will be key drivers of the market in 2013.
This renewed interest from European cross-border and global investors in the European markets is very positive news. While these investors are predominantly risk-averse, we are seeing some attraction from opportunistic funds both in the core and peripheral markets, which we expect to continue throughout 2013.
According to our pan-European research, overseas purchasers have increased their presence predominantly in the UK (from 35% to 46% between 2011 and 2012), Germany (35% to 47%), Poland (90% to 96%) and France (42% to 45%), although there is a rise in appetite for the whole of Europe. We are seeing a renewed interest in the Netherlands and Nordics for good quality product and opportunistic buyers are increasingly active in Ireland and Spain.
It is not surprising that interest is notably strong in London, Paris and Germany’s top markets – Berlin, Frankfurt, Hamburg and Munich – which are perceived by investors as core, stable markets and hence less likely to be affected by wider global economic challenges. In addition, during 2012, Poland recorded the highest annual investment volume since 2006 at €2.7bn, with German and US purchasers the most active, representing 40% and 23% of the total investment volume respectively. We expect German funds to continue as the most active investors in the prime end of the Polish market in 2013.
In Ireland and Spain there is increased interest from opportunistic buyers where pricing has become more attractive; the former has already recorded growth in investment activity. We predict that total investment turnover for 2013 could reach and even exceed €1bn in Ireland, which compares with €576m in 2012. In Spain the market continues to be challenging, although steps are being taken by the Spanish government such as restructuring the banks and creating Sareb, the so-called bad bank, to isolate toxic assets.
The intention is to address the situation and regenerate investor confidence that Spain is on its way to recovery and a return to stability.
New entrants of note in the European investment markets over recent months include Latin American real estate group Carso, which began investing in Spain at the end of 2012. While actual investment from foreign buyers in Spain remains subdued, Latin American investment in the market rose significantly in 2012. Capital from Chile, Venezuela and Mexico amounted to approximately €488.5m in this period making up 22% of the total investment volume, up from approximately 0.5% in 2011.
A further notable new investor in European markets is the Azerbaijan State Oil fund, which has entered the French market. It is worth highlighting that 2012 was characterised by a significant growth in activity from sovereign wealth funds from Norway, the Middle East and Asia, which has resulted in an expanding deal size as well as an increase in the number of portfolio acquisitions.
Aside from cross-border investment activity, the European investment market has remained polarised with the UK, Germany and France accounting for 74% of the total turnover in 2012 of the 13 countries we survey. Total investment in these markets reached €116.9bn in 2012 showing a 10.3% increase on the previous year. Not only has investor interest been primarily focused on the UK, Germany and France but the activity has increasingly been directed at a small number of cities: London, Paris, Berlin, Munich, Frankfurt and Stockholm accounted for 50% of the total investment volume, with London alone capturing 23%.
We have also identified a diversification in portfolios with purchasers having to look to alternative assets due to a lack of prime quality product. In particular, multi-family residential and development sites along with student housing have seen a rise in interest. However, offices and retail will continue to remain the firm favourites in European commercial investment markets.
We expect to see some gradual improvement in business sentiment across Europe, which will support a more balanced market with activity evenly spread as peripheral countries begin to look more attractive. Europe will continue to attract an increasing number of foreign investors, including sovereign wealth funds and opportunistic funds, and we believe investment activity will be boosted by opportunistic deals, bank deleveraging and some distressed sales in 2013. Overall, we expect investment activity in the core markets to remain at a high level since a growing volume of equity is available for real estate investments.
Marcus Lemli is head of investment for Europe and CEO of Savills Germany