Europe’s commercial real estate investment market has had its strongest first half in eight years, putting it on course to eclipse the annual record level attained at the tail-end of the last market boom in 2007 by December, analysis by research firm Real Capital Analytics (RCA) shows.
Unprecedented transaction levels in London, plus strong increases in the Nordic region, the Iberian peninsular and Italy, powered Europe’s EUR135.3 billion of investment activity in the first six months of the year – a 37 per cent rise compared with the first half of 2014. The growth in investment in the first three months of 2015 continued into the second quarter, when there was a 16 per cent rise from the same period a year earlier to EUR65.5 billion.
Simon Mallinson (pictured), RCA’s Managing Director for EMEA & APAC, says: “Europe may surpass the record set in 2007 as real estate continues to attract a broad range of investors looking for higher yielding assets. Eight years ago, activity slowed in the second half as the credit crunch began to bite and escalated into the full-blown Global Financial Crisis. Historic low interest rates, reduced levels of leverage and the broadening investor base mean that market conditions are currently very different from then.”
A string of substantial portfolio sales propelled investment in London to EUR28.9 billion in the first half, an 86 per cent rise from a year earlier, enabling it to overtake New York City as the world’s top destination for real estate investors. Notable transactions included Brookfield and Qatar Investment Authority’s EUR3.6 billion takeover of the Canary Wharf estate as well as QIA’s purchase of three luxury hotels – The Berkeley, Claridge’s and The Connaught – for an estimated EUR2.2 billion.
The British capital is head and shoulders above any of its rivals as the destination of choice for real estate investors in Europe, RCA’s first-half data show: London racked up the equivalent amount of investment as the seven next most active cities combined. London is also the world’s biggest real estate market for cross-border investors, attracting almost four times more capital than next-placed Manhattan Island in New York, RCA’s research shows.
Large portfolio purchases also lay behind the 63 per cent increase in investment in the Nordic real estate markets, which registered EUR15.5 billion of transactions in the first half. These included Citycon’s EUR1.47 billion acquisition of Norway’s second-largest shopping centre owner and manager, a Starwood Capital fund’s purchase of a portfolio of properties in Sweden and Norway for a sum in excess of EUR1 billion and Partners Group’s EUR423 million purchase of 30 retail properties in Norway.
There was almost a six-fold increase in activity by value in Norway in the first half from a year earlier as a result of these large transactions. Denmark and Finland each had more than a 60 per cent growth in investment activity, although Sweden dipped 7 per cent, RCA data show. The transactions momentum in Nordic markets is set to continue following Blackstone’s announcement in July of a EUR2.4 billion purchase of real estate in Norway and Sweden from 10 funds advised by Obligo.
Tom Leahy, RCA’s Director of EMEA Analytics, says: “The Nordic region appeals to international investors because it is made up of small, wealthy and dynamic economies with core investment characteristics. The weaker Norwegian krone, pressured by falling oil prices, has made real estate there particularly attractive. International investors are buying portfolios to scale up in these markets because there is less competition for large transactions from domestic or regional players, who tend to dominate the regular deal flow.”
The Norwegian krone depreciated by 29 per cent against the dollar in the 12 months to the end of June 2015 as a result of the slide in the price of oil, of which Norway is a major producer. Exchange rates also lay behind the 12 per cent decline in investment in the Swiss market following the central bank’s decision in January to abandon its currency cap, which led the franc to appreciate by 14 per cent against the euro by the end of June.
Of Europe’s larger “core” markets, Germany had a 35 per cent increase in transaction volumes in the first half to EUR29.1 billion while the Dutch market grew 30 per cent to EUR5.91 billion by offering higher property yields and as government reforms encouraged housing associations to sell market-rate rental stock to institutions. France, Europe’s third biggest real estate investment market after Germany and the UK, registered a 17 per cent decline in activity in the first half to EUR10.6 billion. Last year’s numbers were inflated by Lone Star’s EUR1.2 billion acquisition of the Coeur Défense office complex in Paris while there was a 48 per cent decline in activity in the French capital during the second quarter.
Italy, Spain and Portugal registered the fastest growth rates in Europe as sovereign wealth funds acquired trophy buildings and mainly U.S.-based private equity firms targeted the Eurozone periphery for opportunistic purchases. Italy registered a 169 per cent jump in transactions to EUR5.64 billion in the first half, activity in Spain grew by 87 per cent from a year earlier and Portugal recorded more than a nine-fold surge from a low base to EUR1.27 billion, RCA’s data show.
RCA’s Mallinson, says: “Ultra low interest rates are causing immense amounts of global capital to flow into commercial real estate in Europe. Investors appear comfortable that pricing provides a sufficient cushion for the moment when benchmark interest rates rise and are sanguine about the risks posed by the unspectacular growth outlook. It’s going to take a substantial shock to slow down this bull market, which is on course to enter the record books.”
Source: Property Funds World