Germany looks to outplace UK for commercial real estate investment in 2017

The UK has retained its position as Europe’s top investment destination however, according to Savills, it is Germany that stands out as a leading performer and is looking likely to outperform the UK’s total volume by the end of the year. In Poland this year’s total volume is expected to hit approximately EUR 4.5bn, matching that recorded in 2016.

Savills latest European Investment Briefing cites that Germany was the top spot for investment in Q2 (€13.8bn). Commercial property changed hands for a total of €26bn in H1, representing a y-o-y increase of 41%, demonstrating that Brexit has underlined its ‘safe haven’ status and risk averse investors are favouring its less politically volatile landscape. Furthermore they are willing to pay the 50-75 bps for income security. Savills is now anticipating that Germany will achieve a record volume of transactions in 2017, in excess of €60bn.

Alice Marwick, Savills European Research, says: “The volume of investment into Germany is on average 29% higher in the second half of the year compared to the 11% increase in the UK, so it is therefore likely that the German investment volume will overtake the UK in 2017.”

In addition to Germany, Savills indicates that the Netherlands, Spain and Austria should also achieve record volumes this year as they have all surpassed their five year averages for this period by: 93%, 81% and 71% respectively. Savills has attributed this surge in activity largely to ‘the rise in mega deals’ and Spain has been attracting the attention of overseas buyers with cross border investment doubling over the past five years. Interestingly, retail and industrial are the favoured asset classes, as opposed to offices like the rest of Europe.

On the whole, cross border investment volumes into Europe rose from €42.0bn in H1 2016 to €50.1bn in H1 2017 and 53% above the long term average, largely thanks to the increase in cross border flow of capital into Austria, Germany and Norway, as well as Spain.

Marcus Lemli, Head of Savills Germany and European Investment, comments: “The United States remained the most active cross-border investor in H1, however, we are seeing European investors becoming more active and investment from Asian investors decreasing slightly compared to previous years. Chinese investors are seeing increasing pressure from capital controls therefore European funds are taking advantage and snapping up trophy assets in mainland Europe.”

Contrary to the majority of European countries surpassing their five year average half year investment volumes, Ireland, France and the UK all saw fell short of their averages.

“Lack of supply however as opposed to lack of demand is the main cause of the fall, however we will see a pick up in the investment volume in the second half of the year as a number of portfolio investments currently under offer will change hands,” suggests Marcus Lemli. “Subdued activity in France is likely due to pre-election uncertainty however the Macron victory has restored confidence and the total investment volume this year is set to be in line with 2016.”

According to Savills, the scarcity of quality commercial space is also creating a highly competitive marketplace, with some investors looking to put all their eggs in one basket and investing in trophy assets instead of diversifying across various smaller assets. In 80% of markets Savills analyses this trend pushed their half year investment volumes over their long-term averages.

In terms of favourable asset classes in Europe during the first six months of 2017, offices continue to take the lion’s share of investment volume yet Savills notes that it is logistics that has seen the biggest rise in activity (+40%). Alice Marwick, research analyst at Savills, states: “Prime CBD yields are at record lows across our survey area and are unlikely to fall in core markets. Therefore, countries experiencing a limited supply of prime product in the CBD and high pricing are seeing investors focussing their attention outside of the CBD and towards other asset classes. As a result, investment in industrial real estate will continue to surge as investors look towards value-add opportunities in core locations and appetite will increase for assets in non-CBD locations, where yields are falling at a slower pace.”

The volume of investment into Polish commercial real estate in Q2 2017 topped EUR 1bn. According to Savills, given transactions pending, this year’s total volume is expected to hit approximately EUR 4.5bn, matching that recorded in 2016.

Michał Stępień, Associate, Investment Department, Savills Poland, says: “According to Savills, if several large portfolio deals are closed, the investment volume in Poland in H2 2017 is expected to double that seen in H1 when the Czech Republic was unusually ahead of Poland in terms of real estate trading activity. The Czech Republic’s outperformance is however unlikely to become a lasting trend. Poland continues to dominate Central and Eastern Europe and we don’t expect this to change given the size of its market. Compared to Western Europe, Poland is still a relatively small and young market, but it successfully attracts equity investors with favourable yields and strong economic growth forecasts.”

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