However, several European countries analysed in the report from international real estate firm Savills are seeing increasing investment activity this year. Italy with growth of 54%, Sweden up 33%, Poland up 15%, the Benelux countries up 12% and Finland up 479%, have all performed well. The report says that the data shows that investor appetite is healthy for quality assets in markets with strong fundamentals.
In terms of sectors, industrial has gained ground, increasing by around 19% year on year. This was driven mainly by transactions in the logistics and distribution sector in the UK, Germany, Sweden, Spain and the Netherlands, which accounted for more than 80% of the total activity.
Over half of the markets across the continent did record a decrease in transaction volumes in the first three months of the year. Lower volumes were observed in the markets which are ahead in the investment cycle such as the UK with a decline of 48%, France down 47% and Germany down 12%.
It is believed that the stagnating European economy, the unpredictable outcome of geopolitical tensions in Europe, and the volatility of the stock markets could all be factors influencing investor sentiment and delaying decision making.
Savills however insists that these lower volumes are not a reflection of investor demand for real estate in Europe, but of the lack of stock currently available in the marketplace.
‘Demand for commercial real estate in Europe remains strong amongst domestic and cross border investors and deals are still closing at record prices. The predominant threat to an increasing turnover is the lack of good quality assets on offer,’ said Eri Mitsosterigiou, director of European research at Savills
On the other hand, Denmark with a fall of 62%), Norway down 47%, Spain down 24% and Ireland down 33%, all experienced dynamic investment activity in 2015, therefore it is unlikely for them to rival these strong performances in 2016.
According to Marcus Lemli, head of European investment at Savills, the markets that are likely to continue to be high on investors’ agendas this year are the core markets of Germany and France, which, despite competitive pricing and unbalanced levels of supply and demand, remain attractive due to their solid fundamentals and high liquidity.
‘Strong occupier markets and low development activity is also expected to boost rental growth in these markets over 2016,’ he added.
Savills predicts that in 2016 prime CBD rents will grow by 3% to 4% pa in London, by 3.5% in Paris and by 2% in the big four German big cities. From a pricing perspective there is also still some space for further gains in the shopping centre and logistics sectors in Paris, if the yield levels achieved in the previous peak of the cycle are used as a benchmark.
‘There are markets that have not yet reached their full potential compared to their peak levels of investment activity in 2007. ‘These include the Nordics, the peripheral markets and the Benelux countries, where transaction volumes are still rising,’ said Mitsosterigiou.
‘The dynamic activity within these markets has been reflected in strong prime yield compression. There is still strong potential in these markets as some sectors, namely shopping centres and logistics, still have a way to go to reach their 2007 peak volumes, therefore offering attractive opportunities for investors,’ he pointed out.
The report also says that the economic recovery in Ireland and Spain is fuelling the leasing markets and this year they are expected to be top performers in terms of prime office rental growth with 13.9% year on year in Dublin and 6% in Madrid. Similarly high levels of activity are predicted in the Stockholm market where Savills forecasts prime office rents to increase by 10%.
‘With low interest rates and a stable economic environment, the demand for real estate investment is likely to remain high and we certainly expect volumes to pick up over the course of the year,’ said Lemli.
‘Historically low yields and record prices as well as the economic and political uncertainties will prompt some investors to realise capital gains and offload some real estate, which will increase the availability of product,’ he concluded.
