JLL: direct real estate investment at weakest level since 2003

Total direct real estate investment in Europe totalled an estimated EUR 32bn in the second quarter of 2008, down 14% on the previous quarter and 44% on the same period in 2007, according to new figures from property broker Jones Lang LaSalle.

The UK, Germany and France, which historically dominate with around two-thirds of total transactions, accounted for just over half over total activity as their volumes fell to EUR 35bn in the first half, down 60% year-on-year. The UK recorded approximately EUR 8bn of transactions in the second quarter, slightly more than the EUR 9bn in the first three months of the year.

Tony Horrell, head of European Capital Markets at JLL, said: 'The continued limited liquidity in the debt markets will restrict the number of big deals and larger portfolios. Consequently we expect total volumes in 2008 to be around 45% lower than last year's total of EUR 244bn. That said, specific buying opportunities are emerging at a varied pace across the region, as a result of acceptance of evolving market conditions. These are not yet across the board but are arising from investors' needs to refinance or recapitalise holdings in light of the financial environment. We expect to see a growing number of transactions agreed from these circumstances in the second half of the year.'

Some smaller markets, such as Belgium, Finland, the Netherlands, Spain and Sweden have proved more resilient and took an increasing share of the market in the first half with a number of significant portfolio and corporate deals. Similarly, the Central and Eastern European markets have held up and investment totalled EUR 4bn in the first half of 2008, supported by the continued strength of the Russian market in particular.

Cross-border investment activity continues to represent nearly 60% of total activity in the first half of the year, which is in line with the trend of recent years. This is despite evidence of an increase in domestic trading in some markets, most notably Belgium, the Netherlands and Sweden whose cross-border deals slipped to below 50% of total transactional volumes.

While the lack of liquidity in the banking sector remains severe, sidelining many investors, there is still a weight of capital to be spent throughout Europe's markets, according to JLL. Open and closed German funds have invested over EUR 600mln in London so far this year and are actively negotiating in other European markets. Cash-rich Middle Eastern Investors are also present with a particular focus on entity level deals, rather than selective single asset transactions.

Between summer last year and the first quarter of 2008, prime yields moved out on average by up to 60 basis points in offices and retail and a more modest 30bps in distribution warehousing. The latest indications point towards a further shift of around 25bps overall in the second quarter across the sectors. This equates to capital value falls of around 10-15% since last summer, with rental growth softening the impact in some cases. Nonetheless, the absence of transactional activity over the quarter suggests yields will need to fall further to encourage more investors back into the market.

Looking ahead to the rest of the year, Nigel Roberts, chairman of European Research at JLL, said: 'As the impact of the financial crisis filters through to the real economy and further dents confidence, we expect to see clearer evidence of weakening occupier markets in the second half of the year as fundamentals come under pressure.'

Tony Horrell concluded: 'Prices will correct further in all markets and sectors as investors increasingly focus on the relative pricing between markets. Offices remain exposed to the financial crisis and weakening economies. In retail we expect larger lots, notably shopping centres to be most exposed to a price correction in the short term. Warehousing in contrast, with relatively higher yields, appears more defensive, assuming economies hold.'