Spain shines as Southern Europe’s star performer with cross border capital driving investment volumes to post GFC peak

Spain has been leading the recovery of Southern Europe’s commercial real estate market since the GFC, thanks to continued interest from foreign investors who have been responsible for 62% of all commercial real estate investment activity so far this year. According to international real estate advisor Savills, investment volumes are now looking to hit €8.9bn this year, a yoy increase of 5%, and a post GFC record.

This positive sentiment has spread to both Italy and Portugal and it is now extending to Greece and Cyprus. After years of weak investment activity, the investment volume across southern Europe has increased by 277% in 2017, compared to the bottom low of €5.2bn registered in 2012.  According to Savills, the total volume is up 8% yoy and southern European markets now account for 10% of total EU investment volumes, compared to 5% in 2012.

Alice Marwick, associate, Savills European Research, comments: “Positive economic growth, falling unemployment rates and renewed consumer confidence are luring investors back to Southern Europe. There are marked differences between the region’s countries, but they do share some key traits. Importantly, all of them depend on cross-border capital flows so far this year foreign investors have accounted for 70% of all activity in southern European countries, compared to the EU average, where cross border investors typically account for 52% of the total volume.”

Savills has recorded that European and US funds are the dominant cross border players accounting for 37% and 38% respectively of overseas investment. In Spain, the majority of cross border capital has been invested into retail assets (48%). In Portugal, retail has been attracting foreign investors’ interest since 2012 however this year offices have overtaken retail with €372m invested compared to €352m retail investment.

“Additionally, the factor that links the countries in the southern European region is their booming tourist industries, with Barcelona, Milan, Rome and Madrid amongst the top ten European destinations for overnight international visitors,” says Alice Marwick. “Notably, Lisbon is one of the fastest growing European tourist destinations in terms of annual growth and due to this trend, and the noted rise in consumer spending, investors will increasingly target high street retail and hotel assets in these locations.”

Savills has recorded that Spain is the third largest tourist destination in the world, recording an annual increase of 10.3%, but Portugal is also seeing growth as Chinese visitors alone have gone up 19% in the last year. In Greece, the travel and tourism sector represents 18.6% of GDP and although the Greek market, unlike the rest of the region, is still dominated by domestic investment, as economic fundamentals improve, international investors will be on the look out for opportunities within the hospitality sector. 

“As Spain’s recovery has superseded that of the rest of the region and as the supply of distressed assets becomes limited, investment opportunities are becoming increasingly prevalent in Portugal, Italy and Greece,” suggests Alice Marwick.  “Furthermore, while investment volumes keep growing in Spain, both office and retail yields are at record lows (3.25% and 4.25% respectively) and continue to compress due to lack of product and high demand. In the core market there is now little opportunity for proper returns, although there is some scope for rental growth.”

Luis Espadas, Head of Capital Markets, Savills Spain, comments: “As demand for the traditional asset classes in Spain grows, investors will turn their focus to alternative asset classes. These markets, such as student housing and senior living, may be small at the moment but  there is room for yield movement and more attractive pricing differentials. In addition, the growth of ecommerce in Spain will lead to increasing demand for logistics and warehouse space, which has so far been lagging behind Europe’s core markets. However, it’s worth noting that retail is still an extremely popular asset class in Spain.  2017 was the first year in which retail investment volumes were the highest across all the property sectors.”