London for sure, the German top five, because they offer stability and Paris, because of its size and market liquidity. These have been the investment hot spots for capital into real estate since the evolution of the financial crises. They all are still preferred locations for real estate investments, but a few new tendencies could be observed lately.
There is life in the old dog yet
The UK (EUR 20.2bn) and Germany (EUR 17.4bn) account for more than half (54.6%) of the total transaction volume in Europe in H1/2013 according to RCA. France has lost 16% on the total European investment share and saw a transaction volume of EUR 7.7bn in the first half of the year. The winners in terms of an increase in transaction volume in H1/2013 are Russia (66% y-o-y change) and two countries where a rebound in transaction activity was probably not anticipated at this time yet: Italy (up 114% on a y-o-y comparison) and Spain (+106%). It must be stated though that the changes for the latter two base on low levels in the comparison period, but the analysis gives hope that transaction activities show signs of revitalizing markets. In H1/2013 the Italian and the Spanish markets had a share of slightly more than 5% of total transaction volume on the continent.
Shifting up the risk curve
Investors are shifting up the risk curve again. In Russia for instance, pre-lettings only account for a small percentage of total take-up, which is reflected in comparably high vacancy rates (e.g. 13% for office space, which can go up to 80% of new space coming to market). The increased interest in transactions in countries like Spain or Italy, on the other hand, can be explained not only by the improving economic outlook but also by the relative gap in real estate investment yields between the north and the south of Europe: in Q2/2013 investment in office buildings in the peripheral countries showed yields that were approx. 2.5% higher than in the Scandinavian countries. In the saturated markets, investors have increasingly re-discovered the secondary locations in order to satisfy heir appetite for returns. Prime locations have become too expensive for many of the real estate investors. However, focus still lies on preferred locations and quality buildings that are backed with strong covenants on long term leases also in the secondary markets.
Mind the refinancing gap
It seems that we are slowly getting back to normality in the European real estate investment markets. The near future will show, whether the peripheral countries can maintain the regained confidence. We should however not forget that, despite the deleveraging that has taken place over the last couple of years, there still exists a significant refinancing gap, which may amount to EUR 60bn across Europe and may even double as a result of regulatory impacts. Commercial banks still dominate the market for private debt with more than 90% market share, but non-bank lending is emerging and has almost doubled in volume.
For further and more detailed information on the different European real estate investment regions, please download KPMG’s European Real SnapShot! This publication covers more than 20 countries across the continent and provides you with deeper insights into the individual real estate investment markets on a biannual basis.
(Quoted: RCA, Real Capital Analytics)