Total European real estate deal volume in the third quarter of 2020 fell 43% to €44 bn compared with the same quarter of 2019, as the slump caused by the Covid-19 pandemic deepened, RCA’s European Capital Trends Q3 2020 report shows.
Transaction volume in the first nine months of this year was down 19% to €172 bn.
The stark findings will come as no surprise to European investment professionals who report a slowing market.
It will also come as little shock that Germany has been the most active market so far this year given investors have been viewing the country as a 'safe haven' compared to other jurisdictions. However, experts are wondering how long that might continue given the recent rise in lockdown actions taken by the German government in the face of what it says are rising corona cases in line with other European nations.
Germany has seen Q3 year-on-year deal flow drop 47%. Meanwhile, the UK has dropped 30%, France 51%, the Netherlands 49%, Sweden 26%, Italy 46%, Spain 73%, and Poland 18%. Switzerland saw an 89% increase. Norway maintained the same level.
Year-to-date, Germany has fallen 5%, the UK 21%, France 24%, Netherlands 27%, Sweden 12%, Italy 36%, Spain 50%, Norway 11%, and Poland 12%.
Germany’s slowdown saw €9.74 bn transacted in Q3, the slowest period for deal-making in Germany since 2013 with the apartment sector 40% down on the five-year average, while quarterly office investment was at a seven-year low.
Despite the slowdown, real estate participants are reporting to PropertyEU the likelihood of record low yields being achieved for some prime offices in Germany amid strong demand particularly from domestic German buyers. Union Investment Real Estate recently acquired the office building Neue Balan Haus 27 in Munich for a price tipped to be €345 mln, representing a gross yield of 2.9%.
RCA said in its report, ‘German core office markets are historically expensive’ and the lack of activity may reflect a widening gulf between seller and buyer expectations on pricing.
German investors have been the major source of European cross-border capital in 2020 so far, spending just over €11.2 bn. Allianz was the most active investor placing €2.2 bn, with DWS, Union Investment, Deka and Patrizia each having committed more than €1 bn in the first nine months of this year.
Prominent new entrants to the European market in 2020 include: Cortland, a U.S.-based private investor; Vantage Data Centers, making its debut in in Newport, Wales; and, Sun Venture out of Singapore in the £177 mln acquisition of Commonwealth House in central London.
The flow of investment into logistics properties has buttressed the industrial sector overall and it was the only income-producing property type to show similar levels of deal activity so far this year compared with 2019.
Transactions in the European logistics sector have totalled €8 bn in the Covid era.
European development site sales for the construction of industrial property totalled more than €700 mln in Q3, making it one of the stronger quarters on record and underlining the optimism for the sector.
In the UK, which has lagged well behind Germany in investment transaction volume for the first nine months of 2020, there was a rebound in regional property markets thanks to industrial sector deal activity, where just under £1.8 bn was spent, mostly on logistics assets. This included Legal & General’s £201 mln forward purchase of a unit pre-let to Amazon. This deal represented the highest price paid for a single logistics big shed that RCA has recorded in Europe.
In France, third-quarter transaction volume was around half the level seen a year ago, but investment activity in the French market was in line with Q2 2020 which is better than Europe as a whole. In Paris, quarterly investment totalled €3.9 bn, of which €3.2 bn was for offices.
In contrast to France, the Dutch market slowed considerably in the third quarter, particularly in the apartment sector, which has been the most sought-after property asset class in the Netherlands. Quarterly deal volume dropped to the lowest since 2014.
In the Nordic markets, Sweden, Norway, and Denmark all outperformed the European average in the third quarter. The Danish apartment sector has been particularly active with multifamily investments topping €1.9 bn in the last two quarters and many of the biggest deals have involved overseas players.
Commenting on the overall 43% crash in Q3 volume, RCA said: ‘The pandemic is speeding up major long-term trends in the European real estate investment market. The decline in bricks-and-mortar retail is worsening while the logistics sector is going from strength to strength.’
Tom Leahy, senior director EMEA Analytics at RCA, explained: ‘Two quarters on from the start of the covid-19 pandemic in Europe and a clear hierarchy of investor demand has emerged. Industrial, especially logistics assets, apartments, and grocery stores sit at the top of the table; in the middle are offices, where worries over rising vacancy and falling rents seem to be holding back some investors; and, down at the bottom are hotels and large swathes of the retail sector.’
