European commercial real estate investment has fallen to the lowest level in six years in the first quarter of 2019, with slowing economic growth and political uncertainty weighing on markets, according to new research from Real Capital Analytics (RCA).
High pricing and the difficulty of sourcing assets have also been impacting sentiment, the Europe Capital Trends Q1 report suggests.
Investment deals - totalling €44.5 bn between January and March - were 32% down on the same quarter of last year and at the lowest level since 2013. The figure was also well below the €71 bn average European deal flow recorded in recent first quarter periods, RCA said.
Residential rise
Despite residential investment volumes being relatively weak in the first three months of the year, the sector continued to pull ahead of plummeting retail transactions, entrenching its position as the second largest European property investment market after offices.
Retail volumes crashed to a 10-year low in the first quarter, down 62% year-on-year, and was particularly poor in the UK, where transactions recorded the lowest level ever.
'Investors appear to be voting with their capital in favour of alternative property asset classes and particularly residential over retail,' said Tom Leahy, RCA’s senior director of EMEA Analytics.
'The inroads made by e-commerce into the market share of physical stores has undermined retail’s previous reputation as the stable rental income producing mainstay of investment portfolios.'
The European residential investment market is also broadening geographically and increasingly attracting cross-border capital flows. Apartment investment volumes were at a record level in the Netherlands, Ireland, Portugal and Belgium over the last 12 months.
Brexit saga
At a country-level, the Brexit saga continues to impact on investment volumes in the UK, with the first quarter of the year the slowest for transactions since 2016. A two-speed market saw demand for hotels, apartments and senior housing climb above the recent average, while investment in the core commercial parts of the market was down by 50% versus the average over the last three years.
London did, however, buck the wider trend, as investment volume rose in the first quarter, compared with a year ago. This was chiefly due to the acquisition of the new Goldman Sachs headquarters by LaSalle on behalf of South Korea’s NPS. At £1.2 bn (€1.3 bn), this was the second highest price ever paid for a single asset in London.
Even without this deal, parts of the city’s market remain relatively buoyant, notably in the alternative property sectors, with close to €1.6 bn of hotels and €832 mln of apartment buildings trading.
Mixed fortunes
Europe’s perceived ‘safe haven’ market Germany lagged behind the UK’s weak performance, recording a slower first quarter than is typical. The reluctance of some buyers to acquire assets at current asking prices, combined with the cuts in German economic growth forecasts, probably lies behind the cooldown in the market, RCA suggested.
France also experienced a slow start to the year, with Paris volumes declining by 35% in Q1, as office deals hit a six-year low. In the Nordics, Sweden and Finland had a comparatively strong first quarter, but this was from an exceptionally low base in the same period of 2018, RCA said.
Utrecht was a notable standout in the rankings of the most active European real estate markets in the first quarter, appearing in sixth place. This Dutch city has never been ranked so highly, standing at 21st and 27th place in 2018 and 2017 respectively. The Netherlands as a whole was the fifth most active market in Europe in the first quarter, which included €1.3 bn of residential acquisitions - a 40% increase on the same period of last year.
Cross-border play
Cross-border real estate flows within Europe held up better than domestic and non-European volumes in Q1 2019 and over the past 12 months, reaching a cyclical high of €73 bn.
Capital from US-headquarted players was at the lowest quarterly level since 2013, but there are €5.0 bn of completed deals in the pipeline for the second quarter, RCA noted, exceeding the first quarter total.
