'Asset fundamentals & income generation' set to define European investment activity in 2017
09 March 2017
European commercial real estate investment activity in 2016 was the third highest on record, according to international real estate advisor Savills, who recorded total transaction volumes at €207bn. The firm notes that despite this figure being 15% down yoy, for some markets, namely Italy (25.5% yoy), the Netherlands (24.4%) and Sweden (32.2%), 2016 was the best year to date for investment into commercial property.
A 31.4% decrease in the UK and an 8.7% drop in Germany are mainly responsible for the overall yoy decline as together the countries accounted for almost 55% of the total activity in Europe.
Eri Mitsostergiou, Director of European Research, Savills, comments: “The uncertainty caused by the EU Referendum has in fact had little impact on continental Europe. We have now reached the stage of the investment cycle, where a shortage of large-scale quality assets in key locations, such as Germany and Spain, has caused activity to slow in these markets, with investors looking to deploy capital elsewhere.”
According to Savills, the Netherlands, Poland and Italy have all proved attractive as they are at earlier stages of their cycles and still offer prime yields above the European core markets in some segments, presenting investors with more attractive returns and potential for further yield compression.
The UK remains the largest commercial investment market at €59.1bn, followed by Germany at €52.7bn, France at €27.4bn and Sweden €14.8bn.
Marcus Lemli, CEO of Savills Germany and Head of European Investment, comments: “With the geopolitical landscape looking increasingly uncertain in 2017, high competition for prime assets in these core markets is expected to intensify once again as the established real estate of these countries remains a reliable, transparent and safe place to store value for the foreseeable future. We expect investors to focus on markets and assets with strong fundamentals – with low supply and strong demand, good rental growth prospects, and alternative assets.”
Savills recorded that alternative investments also strengthened their position in many markets in 2016 including: Norway (+144% yoy); France (+14%); Sweden (+31%); Finland (+30%) and Germany (+18%). “The motive behind this increase is investors shifting their attention to higher yielding, long-term income producing assets such as student housing, senior accommodation and healthcare,” says Lemli. “And bearing in mind the increasing competition for the limited supply of product, we believe that the geographical relevance of core vs non-core will become less important and the focus will shift towards asset fundamentals and income generation.”
Given the limited prospects for significant capital growth, Savills also claims that markets and sectors with rental growth potential will be high on investors' agendas. Dublin, Madrid and Barcelona, are some of the cities where Savills predicts positive rental growth trends in the retail sector, while Paris (7.6%), Dublin (6.3%), Milan (4.0%), Madrid (3.6%), Barcelona (4.7%), Stockholm (8.3%) and Berlin (6.0%) are the top cities for rental growth in the office sector.
In terms of outlook for this year, Savills is confident that European real estate will continue to be a target for investors who are looking for less volatile assets with higher returns than the ones offered by other asset classes and for cross border players who seek diversification and exchange rate gain opportunities - particularly in the UK.
On the supply side, Savills expects to see more disposals by funds and REITs with assets approaching maturity, as well as from investors that will want to benefit from the ultra-low yield environment. “Nevertheless, scarcity of supply is likely to hinder investment volumes for another year, particularly in the core markets, leading to a reduction of 5-10% yoy of the total transaction activity by the end of 2017,” adds Eri Mitsostergiou.
