Global capital flows into European real estate

in Advisory, Real Estate, 06.10.2014

Transaction volumes in the European real estate investment markets are primarily driven by global investors. They have increased their investment share in almost all markets.

The investment activity of global investors is principally focusing on the highly liquid major cities such as London and Paris. However, increased activity was also noted in peripheral markets, which have attracted opportunistic capital mainly from the United States.

High transaction activity

Transactions of investment property reached EUR 89bn across Europe in the first half of 2014. This is a strong increase of 10% year-on-year and follows the outstanding 17% annual growth rate in 2013.

Once again, the most important investment market in Europe by far was the UK, with investments reaching EUR 28bn, which was a 19% increase in its investment volume year-on-year. The UK accounted for almost one third of the total real estate investments in Europe in the first six months of 2014. Investment activity is still concentrated on the Greater London area, which accounts for 50% of total investments made in the country.

The German real estate investment market attracted the second highest share of investments made in Europe in H1 2014; however, the transaction volume of EUR 19bn is a slight decrease of 2% year-on-year. France, on the other hand, reported a significant increase in investment activity by 39% year-on-year to EUR 13bn. It should be noted that investment activity in France is concentrated on the Greater Paris area, which accounts for a share of 70% of the total transaction volume in H1 2014.

Mostly strong peripheral markets

Once again, Spain recorded a significant influx of foreign capital, which brought about a stunning 124% increase in transaction volume in the first six months. Ireland also reported an uplift of 39% in the transaction volume year-on-year. In Italy however, transaction activity has been negative compared to the previous year.

US investors were the most active in the peripheral markets, representing 75% of the global capital invested in the peripheral markets.

Residential property on the descent?

Focusing on the sectors across Europe, offices once again attracted the greatest interest, accounting for around 41% of total European real estate investment in H1 2014, with retail and residential properties accounting for shares of 25% and 12% respectively. Transaction volumes in the hospitality sector accounted for 8% of the total investments made in the first half of the year.

Compared to the same period last year, the greatest increase in investment volumes were recorded for retail and office properties, with 51% and 14% respectively. The high growth in the retail segment resulted from a relatively high number of major shopping center deals in the UK, France and Germany. Conversely, a decrease in transaction volume was noted in industrial (-2%) and residential property (-26%).

Prospects remain positive

Looking ahead, we expect that investment activity in secondary cities and in the peripheral markets will continue to increase due to highly competitive pricing in the sought-after economic centers. Nevertheless, activity will be linked to economic recovery and the political stability of the individual geographical areas. The proportion of investments made in the core markets will remain high as major transactions concentrate on these liquid investment markets. As long as re-financing rates remain low, real estate will remain in the focus of investment managers due to the segment’s comparably favorable risk/return profile, even if prices appear to be overheating in some locations.

Read the detailed report on real estate investment activity in Europe in our latest edition of KPMG Real SnapShot!