European commercial real estate investment slowed in the first three months of 2014 as investors struggled to deploy capital in the European Union’s biggest economies, analysis by research firm Real Capital Analytics (RCA) shows.

European commercial real estate investment slowed in the first three months of 2014 as investors struggled to deploy capital in the European Union’s biggest economies, analysis by research firm Real Capital Analytics (RCA) shows.

RCA recorded a total of €35.2 bn of property transactions in the first quarter, down 10% on the same period a year ago. The decline follows five consecutive quarters of growth, which helped propel investment volumes to €183.3 bn for the 12 months through March 31, a 17% jump from a year earlier.

The most marked Q1 decline was in Germany, where transaction volumes dropped 31% to €6.7 bn from the year-earlier period. Russia also stood out with a 83% fall in volumes while Moscow dropped out of Europe’s top 10 investment destinations as investors grew jittery about the political and economic uncertainty.

By contrast, investors’ appetite for Spanish real estate continued unabated, powering a 183% surge in transactions to €1.4 bn. This restored Spain to Europe’s Top Five investment destinations on a quarterly basis for the first time since 2010.

The revival of the real estate market in the Netherlands was another noticeable feature of Q1 with a 90% jump in volumes to €1.3 bn. RCA said the rebound in the Dutch market suggests that asset prices have adjusted to reflect the oversupply of offices and the overhang of non-performing loans on bank balance sheets.

Demand for retail properties outside the traditional core markets of Western Europe also ensured that countries on the eurozone periphery, Benelux, Central Europe and Austria-Switzerland each registered more than a three-fold jump in investment volumes during the first quarter. European retail investment According to research released earlier last month by JLL, direct investment in retail real estate reached €6.6 bn in the first quarter of 2014. This marks an increase of 27% on the Q1 2013 volume of €5.2 bn, and 20% above the five-year quarterly average.

Despite the lower investment volume, yields have compressed further across all property sectors in the first three months of the year, according to a report from global property advisor CBRE. The largest yield decrease was recorded in the office sector, which fell by eight basis points leaving the index 24 basis points lower than a year ago. There was also yield compression in some of the markets most affected by the eurozone crisis, including Dublin and Lisbon where yields fell by 50 basis points, while yields in Madrid, Barcelona and Athens fell by 25 basis points.

Commenting on the overall Q1 investment volumes, Simon Mallinson, RCA’s managing director for EMEA, said: 'A pause was inevitable as difficulties in finding suitable investment-grade product has become a familiar refrain from investors who are frustrated by the intense competition for a shrinking pool of assets. This situation has forced many to rethink their investment strategy, helping revive peripheral European markets, where pricing of prime assets is still attractive, and stimulate demand for secondary assets or locations in core markets.’

He added: 'Investors are increasingly turning to lower-priced assets in Germany or regional opportunities in France and the UK in order to deploy capital in core western real estate markets. This comes across clearly when analysing the number of properties trading within fixed price per square metre tiers.'