Pricey London leads seasonal slowdown in European deals

Record prices in London acted as a brake on the rise in total real estate investment volumes in Europe from July to end-September, an analysis by research firm Real Capital Analytics (RCA) shows.

RCA reported a 14% drop in activity in the UK - Europe's largest real estate investment market - during Q3.

RCA isn't sounding the red alert yet and is charactering the situation as a 'seasonal lull in activity following three years of strong growth' rather than an impending crash. Deal volumes are still growing, albeit at a slower rate and the downward movement could indicate the beginning of a trend.

'The number of transactions pending completion suggests there will be a strong end to 2015, so we’re not reading too much into a lull at the moment,' said Tom Leahy, RCA’s director of EMEA Analytics. 'Prices in Central London, which has led the rest of the European market through the cycle, are 77% above their long-term average. This suggests that for certain investment strategies we could be getting towards the end phase of the current upswing,' Leahy added.

Ups and downs
The quarterly drop in investment in the UK curbed volumes for the first nine months of 2015 to €67 bn. Nevertheless, this is 32% higher than the same period a year earlier.

Other markets that weakened in the third quarter included Ireland and Spain, while notable increase in activity in the Netherlands, Denmark, the Czech Republic and Portugal, where transaction volumes at least doubled from a year earlier, underpinned a more modest quarterly rise in deals in Europe.

London - the largest city market in Europe - registered a 6% decline in transaction volumes in the third quarter to just under €8 bn. On a nine-month basis, however, the investment market in the UK capital registered a 57% increase in activity versus 2014 with average prime net initial yields falling to the lowest recorded by RCA.

Flipping assets
In fact, the London market has been so strong that it has allowed some investors to trade in and out of the market within the space of two years and achieve substantial cash-on-cash increases in the sale value of their assets. RCA data show that there were 22 of these asset 'flip' property trades in the year ended September 30, with a total transaction value of more than €1 bn.

The number of assets that have traded with this short hold period in the last 18 months has now eclipsed the level seen at the height of the last boom in 2007, further emphasising the strength of the market.

One example is the third-quarter sale by Ares Capital and Harel Insurance of Ten Fleet Place in the City of London financial district for £188 mln to Crosby Group and Wing Tai Properties. The sale price was 66% more than the price paid for the building when they acquired it 23 months earlier.

RCA’s Leahy concluded: 'Investor sentiment towards Europe’s real estate markets remains strong and there is plenty of capital seeking a home in property. Suggestions from the European Central Bank that it is open to more monetary stimulus to foster growth in the Eurozone will preserve low interest rates and support the investment case for real estate.'