Investment in European commercial property up by 25% in 2015 year on year

A total of €64.5 billion was invested in European commercial property in the final quarter of 2015, which took volumes for the full year to €238.5 billion, a 25% increase on 2014.

However, the fourth quarter total was only slightly up, by 0.5%, on the same quarter of 2014, indicating that investment growth lost a little momentum towards the end of the year, according to the latest European quarterly commercial property outlook report from Knight Frank.

However, it shows that increases in investment activity were widespread in 2015, with the core markets of the UK, Germany and France all seeing transactions rise by more than 20%.

Among peripheral markets, investment volumes grew particularly strongly in Italy and Portugal, both fuelled by surging demand from international investors. The strength of investor demand kept European prime yields under downward pressure throughout 2015, although the pace of yield compression slowed in the final quarter.

Also, the European weighted average prime office yield came down by four basis points in the final three months of 2015 to an all-time low of 4.79%, largely on the back of yield compression in Amsterdam, Berlin, Brussels, Copenhagen and Lisbon.

The report points out that with large amounts of capital continuing to target European property, strong investment activity is expected to continue in 2016. However, the exceptional growth in transaction volumes seen in 2015 is unlikely to be repeated.

Knight Frank’s forecast is that European investment in 2016 will be broadly in line with 2015 volumes. Many of the factors that supported the investment market in 2015, including the stabilising Eurozone economy, low interest rates and wide yield spreads to other asset types look set to remain favourable to property investors throughout 2016, the report says.

The report also points out that Eurozone GDP growth is forecast to improve modestly to around 1.7%, following an increase of 1.5% in 2015. The European Central Bank has indicated that it may be prepared to make further interest rate cuts to support economic growth at a time when its main refinancing rate is currently 0.05% and the deposit rate is already in negative territory at -0.3%.

Supported by the stabilisation of the Eurozone economy, European occupier market activity improved healthily in 2015. On an annual basis, aggregate take-up in the major markets monitored by Knight Frank rose by 10%.

This was despite falling take-up in Europe’s two largest markets, London and Paris, and was driven by the strong performance of German, Iberian and CEE markets.

Prime rents remained stable in the majority of European markets in the fourth quarter but the Knight Frank European Prime Office Rental Index rose by 0.9%, driven by increases in Dublin, Frankfurt, London (City), Madrid and Stockholm.

The report suggests that rental growth may spread to a wider range of cities in 2016 with Paris, for example, expected to see prime office rents increase following more than two years of stability.