UK leads Europe’s commercial property investment slowdown

The UK led a slowdown in commercial real estate investment across Europe in the first half of 2016, research by Real Capital Analytics (RCA) shows.

The total value of commercial property transactions completed in Europe during the first six months fell by 35% from the same period in 2015 to €107bn, as the uncertain outcome of the UK’s referendum on its European Union membership added to a catalogue of risks deterring investors.

The UK registered a 45% decline from a year earlier to €29.5bn, as investor concerns in the run-up to the “Brexit” vote and high pricing played a part in slowing investor activity. The UK accounted for more than half of the total drop in investment in European commercial properties during the period.

The value of transactions in London, which ranks second to New York in the world’s top investment destinations, fell by 52% to €14.0bn in the first half. Pricing in the Central London office market, as measured by the RCA/PD Commercial Property Price Indices (CPPI), remained little changed on the quarter for the first time since 2012.

After the UK, Europe’s second biggest market, Germany, suffered the most in terms of falling investment volumes, which dropped by 36% versus the first half of 2015. Of the top ten markets, France was next in terms of falling volumes, as investment decreased by 29% over the same period.

Data from RCA on European real estate investment shows that there was a pullback by all categories of investor, notably by those based outside Europe. This was a marked reversal of what for several years has been one of the driving forces of European real estate investment.

The data show that global capital flows went into retreat in the first half, recording the weakest total in three years in the second quarter. It was most pronounced for US-based investors, whose investment fell 59% from the first half of 2015 to €11.0bn.

It was not all gloomy for Europe’s real estate markets, however, and there were a number of bright spots.

In Sweden, first half transaction volumes were up 39%, while in Poland they rose by 35%. Investment in Spain, the Netherlands and Italy in the second quarter of 2016 was up substantially on the year – by 76% in the case of Italy.

The biggest outperformer in the first half was the Swedish office market, where office transactions breached €4bn for the first time since the previous peak of the market in 2008. A majority of this was due to the €2.8bn acquisition of the Norrporten portfolio by listed Swedish investor Castellum.

Another highlight was the Dutch office market, where more than €2.0bn of deals completed in the first half. The most high profile of these was South Korean fund KFCC’s purchase of De Rotterdam building for approximately €351m, although Dutch offices also attracted eight other purchases by international investors, each of which was worth more than €100m.

“We appear to be entering a limbo period in which the solid fundamentals for investing in European real estate are counterbalanced by a decrease in investors’ risk appetite caused by broader concerns about economic growth prospects and geopolitical risk,” Tom Leahy, RCA’s director of EMEA Analytics said.

“The second half is likely to see a continuation of the slowdown in transaction volumes in comparison with the strong 2015, but we do not expect market activity to slow to levels seen during the last downturn in 2008-09,” Leahy said.

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