A flurry of large transactions in central London, mainly by Asian investors, restored the UK as Europe's largest commercial real estate investment market in the second quarter of 2017, according to research by Real Capital Analytics (RCA).
Transactions worth a total of €15.5 bn completed in April through June, a 12% increase from a year earlier. This enabled the UK to edge past Germany, the top investment market in Europe for the preceding three quarters. The rebound was also magnified by an especially weak second quarter of 2016 with the lowest deal volumes since 2010, due to uncertainty surrounding the Brexit vote.
'The past quarter was the strongest ever for investment from Asia into Europe and London benefitted as the Continent's deepest and most liquid market,' commented Tom Leahy, RCA's senior director of EMEA Analytics.
'Pricing in Central London still looks attractive in relative terms for Asian investors, especially following the depreciation of sterling after the Brexit vote. The investment flows suggest that the investors are comfortable about prospects for London as a centre for business and finance once the UK leaves the EU.'
Larger, fewer deals
The largest transaction in London last quarter was CC Land's €1.36 bn purchase of the Leadenhall Building in the City of London. A string of these large transactions lifted the average deal size in central London to the highest level on record, even as the number of transactions fell 15% from the second quarter of 2016.
Asian investors invested €6.9 bn in Europe in the second quarter, a figure that will remain strong this year due to high profile transactions that are pending or have recently completed, according to RCA data. These include China Investment Corp’s €12.3 bn purchase of the pan-European Logicor logistics warehouse portfolio from Blackstone and Lee Kum Kee’s acquisition of 20 Fenchurch Street for €1.47 bn.
Weak spots in Europe
The rebound of the UK market was insufficient to lift overall investment volumes for Europe from April through June as the market finished the quarter 10% below the same period in 2016, at €116.9 bn, due largely to weaker deal flows in France and the Nordics.
French deals fell 64% in the second quarter to €2.4 bn, causing France to lose its European top 5 quarterly ranking for the first time, as the market was overshadowed by the country’s presidential and legislative elections. However, RCA said that another €7.7 bn of pending or completed deals since June suggests that France's attractiveness will rebound under Macron.
The Nordic markets were all weaker, except Norway. Sweden, the region’s largest real estate investment market, led the decline with a 49% drop to €3.4 bn of investments. The slide was due to the impact of Castellum’s purchase of the Norporrten portfolio in the second quarter of 2016, which elevated the Swedish market to the top three in Europe at the time. The smaller Danish and Finnish markets declined 34% and 61% respectively in Q2 2017.
RCA analysis found that supply factors may also explain the slowdown in European investment volumes. In the 12 months to June 30 investors purchased €30.8 bn of properties under development or refurbishment for future delivery, often with tenants lined up to occupy the premises.
Germany still strong
Aside from the UK, the other top 10 markets that bucked the weakening trend in Europe were Germany, Spain and Norway.
The €14.6 bn of transactions in Germany that completed in April through June was 21% higher than in the same period last year. German cities accounted for nine of Europe’s 20 top investment destinations with Berlin and Munich ranking in second and third place respectively after London.
'Real estate remains an attractive investment relative to other asset classes in the prevailing low interest rate environment and as some European economies are starting to enjoy moderate growth,' concluded Leahy.
