Germany was Europe’s biggest market for commercial real estate investment in 2016, a year of mixed performances across the Continent, according to new research from Real Capital Analytics (RCA).
Uncertainty over the terms of Britain’s eventual exit from the European Union amplified a slump in investment in the UK, while the Netherlands, Finland and Ireland registered record transaction volumes.
'Germany replaced the UK as the destination of choice for real estate investors in Europe following the Brexit vote in June and as Europe faces potentially more political, economic and monetary upheaval later this year,' commented Tom Leahy, RCA’s senior director of EMEA Analytics. 'The final three months of last year were, nevertheless, the third strongest quarter on record, which shows the underlying strength of the broader market. National real estate markets across the region are at different stages of the investment cycle and this disparity, as well as some county-specific issues, explains the mixed picture for Europe last year.'
Commercial property deals completed in Europe last year totalled €254.6 bn, a 21% drop from the record year of 2015, RCA data show. The slide in overall investment was due chiefly to the weakness of the three largest markets: transaction volumes fell in Germany by 19%, by 43% in the UK and France suffered a 21% fall. A similar pattern occurred in the fourth quarter, when overall European investment volumes declined by 14% from the same period a year earlier, to €78.5 bn.
Germany developing again
The value of German properties that exchanged hands last year fell to €58.8 bn, although the market itself was as active as 2015 in terms of the number of deals that completed. One reason for the lower average deal size in Germany last year was the reduced M&A activity in the listed sector following the creation of Vonovia, via the €3.9 bn combination of Gagfah and Deutsche Annington, in 2015.
Low or negative interest rates have driven up pricing for properties in Germany’s Big Six markets, increasing the appetite for development as banks loosen their lending criteria for project finance, RCA research shows. Sales of development sites in a number of the major German metropolitan markets increased in 2016, bucking the trend nationally and Europe-wide.
In the UK, Europe’s largest investment market over the last 10 years, transactions for October through December fell 45% from the fourth quarter of 2015 to almost €14.3 bn. Amplifying the slide was the depreciation of the pound following the Brexit vote. In local currency terms, the drop in investment was 35% last year.
Brexit fears
The possibility of a drop in tenant demand post-Brexit, as well as high pricing at this mature stage in the cycle, led to a 50% fall in investment in the UK capital to €25.2 bn in 2016. There was a mixed picture across the rest of the UK, with some markets – Birmingham and Edinburgh – seeing an increase versus 2016, while others like Leeds and Manchester saw the reverse.
'The UK market was already close to a tipping point in the investment cycle before the Brexit vote, with price growth moderating and investment volumes slowing. The weaker pound attracted a different profile of overseas investor to Central London during the second half - newcomers and those who found an opportunity in a market that is still adjusting to the new pricing dynamics. More frequent investors in the market were conspicuous by their absence,' said Leahy.
Smaller markets gaining ground
According to RCA, smaller markets that lagged behind Western Europe’s core markets in the investment cycle were last year’s best performers.
Spain registered a 36% rise in transaction volumes last year to €15.5 bn, with the country’s real estate investment trusts (REITs) competing aggressively for assets thanks to their access to low-cost capital. Meanwhile, the Dutch market also enjoyed a record year of investment volumes with a 13% rise in deals to €15.4 bn, mainly focused on the office sector. Finland’s record year was due to large deals, such as the €600 mln sale of the Mall of Tripla development project in Helsinki and Sponda’s €576 mln purchase of the Forum block of six properties, also in the Finnish capital.
'Europe starts 2017 with a patchwork of markets that are at differing stages of the investment cycle, which presents opportunities for those with a strong grasp of the local market dynamics. We also note a mood of greater caution before elections in France, Germany and the Netherlands that may present some surprises, while the steady uptick in inflation means that central banks may start to review ultra loose monetary conditions,' said Leahy.
'A very strong fourth quarter shows that investors are still intent on deploying capital and we expect that core markets, as well as those with income-focused, defensive qualities like logistics, student housing and private-rented residential accommodation will remain in strong demand, as will markets where opportunities around mispricing arise,' he concluded.
