Investment in the European real estate market dropped significantly in Q2 2016 compared to the same quarter last year, falling by 26 percent. EUR 107.5 billion was invested in H1 2016, down by 30 percent compared to the same period in 2015.
Sentiment was positive at Expo Real, the international trade fair for property and investment that was held in Munich on 4-6 October 2016. However, one could feel that some investors lack orientation when it comes to investment decisions.
Real estate investors have become more selective
Brexit has caused uncertainty amongst real estate investors. Britain’s vote to leave the European Union has reduced investors’ appetite for risk. “Safe investments” are at the top of the shopping lists. But the Core segment has extremely limited offerings and supply. This has led to increased competition and further falls in yields. Above all, volume has dropped due to the scarcity of stock available for transactions.
However, the low interest rate environment and the lack of investment alternatives still attract significant funds into the real estate sector. It’s therefore not surprising that in seven of Europe’s ten largest markets, positive trends could be observed.
Germany and the UK make up over 40 percent of the European market and skew the overall total result. The UK lost 53 percent in transaction volume in Q2 2016 compared to the same quarter in 2015 and Germany recorded 42 percent less investment than in the same period in 2015. While the Brexit effect is obvious in the UK, in Germany there are base rate effects that explain a good part of the lower transacted volumes.
On the other hand, there are the markets which stand out positively in terms of transaction activity: amongst others, Sweden (+68%), Spain (+51%) and Italy (+76%) experienced notable growth compared to Q2 2015. Spain and Italy in particular appear to be slowly recovering from their longstanding decline. Finland, in tenth place, was the only other top 10 market to record a fall in transaction activity (-6%).
Digitization’s influence on transaction activity
KPMG’s publication European Real SnapShot! includes contributions from countries across Europe focusing on the impact of digitization in the real estate industry. Each country is at a different stage in developing a technological approach to real estate — some areas are just beginning. However, even the more advanced markets cannot yet claim that they’ve totally embraced digitization in real estate.
Investment markets are anticipating potential developments induced by technological advancements. Retail space in secondary locations, for instance, is clearly becoming less attractive to investors because of the increasing competition from online market places. On the other hand, logistic schemes are of interest due to the increased demand resulting from consumers’ changing purchasing behavior. Nonetheless, central locations with excellent transport links or high footfall remain the focus of investors who believe that centrality is a key element of sustainable value.
Stable market conditions may be triggered
The basis for European real estate investments remains stable. However, Europe is facing numerous (political) risks. Brexit may not necessarily be an isolated event. In the EU, important political decisions are being taken in the near future such as the upcoming Italian constitutional referendum in November and the French presidential and the German federal parliamentary elections in 2017. Political outcomes with negative impact on the economy could lead to an adjustment of economic forecasts which have the potential to put the brakes on the real estate investment market.
The good news is that the market is adequately supplied with debt and equity capital. There’s no credit crisis in sight. Moreover, most market players are holding real estate investments as long term assets, reducing speculative risk. Despite economic and political uncertainties, investment in real estate remains very attractive in the current low interest rate environment.
Full publication: European Real SnapShot! Autumn 2016
- Article: Hunt for Investment Returns drives European Real Estate Markets
- Real estate sector services at KPMG