European commercial property investment decreases

A total of €43.7bn was invested in European commercial property during Q2 2016, according to real estate consultant Knight Frank.

Although this was a 7.5% improvement on the weak performance of Q1, it was 23.5% down year-on-year and confirmed the more subdued pace of investment activity being set in 2016.

The fall in investment in Q2 was primarily due to decreased activity in Europe’s two largest markets; on a year-on-year basis, volumes were down by 50.1% in the UK and by 47.2% in Germany.

However, other European markets showed more positive trends and Q2 volumes were up, year-on-year, in countries including France (+18.5%), Italy (+94.6%), Poland (+43.6%), Spain (+51.3%) and Sweden (+83.2%).

The reduced activity in the UK during Q2 reflected investor caution in the run-up to June’s referendum on EU membership.

“The vote to leave has added to an already uncertain outlook and, as investors assess the impact of Brexit, UK investment activity is likely to remain subdued over the remainder of 2016. However, some international investors will see opportunities created by the depreciation of the UK pound and possible outward yield shifts,” Knight Frank report reads.

Several major transactions have been agreed or completed in continental Europe since the Brexit vote, indicating that there is an ongoing investor appetite for European real estate.  In one of the year’s largest deals, for example, Amundi has agreed to purchase an €875m European office portfolio from KanAm.

“Investors continue to have large volumes of capital allocated to real estate, and this money may increasingly be targeted at prime assets in core continental European cities, as investors become more risk averse in light of economic and political uncertainties. Low interest rates and bond yields will continue to support property investment activity, with central bank interest rates expected to stay lower for longer in the aftermath of the Brexit decision,” Knight Frank’s report reads.

Despite the lower level of overall transaction volumes, prime yields remained under downward pressure in a significant number of European markets in Q2, pushing the Knight Frank European Weighted Average Prime Office Yield to a record low of 4.62%.

Prime office yields hardened in markets including Amsterdam, Brussels, Madrid and Paris, but softened by 25 basis points in London (City).

Source: Real Capital Analytics / Knight Frank Research

Source: Real Capital Analytics / Knight Frank Research

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