Hunt for Investment Returns drives European Real Estate Markets

in Advisory, 11.03.2016

In 2015, the European real estate investment market recorded its highest transaction volume since 2007. Real estate investments increased by almost a quarter year-on-year.

The transaction volume in the European real estate investment market in 2015 was EUR 285 billion, which was just 5% below the 2007 record. Year-on-year, the transaction volume increased by an exceptional 23%.

However, transaction activity was weaker in the second half of 2015, with EUR 73 billion invested in the final quarter, 6% lower year-on-year. In a number of submarkets, prices have now risen to such a degree that even domestic investors are acting with more caution.

High international demand

Demand for European real estate investment was strongly driven by international investors who were responsible for over 50% of total investment. 32% of the transaction volume was generated by global and 20% by supra-regional investors. The highest growth of the past few years was observed in the level of investment by Asian investors.

Investment increased in all real estate segments compared to last year, with the exception of industrial real estate. Investments in office property made up 40% of the total investment volume (+12% year-on-year), but the investment volume at a single asset level was greater: over 200 transactions exceeding the EUR 100 million mark were counted.

At 39%, the highest annual growth was registered for retail investments, which was due in particular to the record high number of shopping centres that changed hands. Real estate investments in retail space accounted for 25% of the total investment volume in 2015. Investors focused on high-quality real estate in central locations, which is reflected in an above-average yield difference compared to investments in poorer quality properties and/or locations.

Even residential property transactions increased by a substantial 39% since last year. The trend towards more rental apartments, and also the greater investment in student residences (20% of transactions in the residential segment), increased the residential segment’s market share to 13% of the total investment volume in 2015.

Record result in the UK

Registering a new record transaction volume of EUR 91 billion (+24% year-on-year) and therefore almost a third of the total investment volume, the UK’s real estate investment market remains Europe’s most important. Despite a slowdown in transaction activity in the fourth quarter of 2015, transaction yields in the UK have stabilised at around 6.2%.

In Germany, the transaction volume increased significantly, by 30% year-on-year, to reach EUR 66 billion. Global investors were responsible for 45% of the transaction volume. An exceptionally high transaction volume was registered for residential property, which was the result of consolidation tendencies in the listed real estate sector for residential property.

In France, activity in the second half of the year in particular ensured that investments increased by 16% year-on-year. France is one of a few European countries experiencing a slowdown in transaction activity by international investors. The most active purchaser group was the USA, but a high number of German investors have also shown increased interest in investments in “la Grande Nation”.

Increasingly, international investors are focusing their investment activity on a small number of central cities such as Milan and Madrid. The Spanish capital has attracted EUR 5 billion of investments and the northern Italian city has seen a total volume of EUR 4 billion. This puts these cities in 5th and 9th places in the ranking of the most popular European investment locations.

Demand remains intact

Despite the relatively stable economic data, international financial markets have been exceptionally volatile since early 2016. There is speculation of a return to recession in response to falling oil prices, the tense situation in the banking industry, fears of a Brexit and the economic slowdown in China. However, this scenario is not supported by current economic data or by the 1.7% growth forecast for Europe by the international currency fund.

Despite the recent slowdown, we expect transaction activity to remain strong in Europe in 2016. In the search for returns in the current low interest environment, there is no means of avoiding real estate investment.

 

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