Total investment volume into European commercial real estate in the first quarter this year was €36.8bn, 30% lower than the same period last year.
However, several European countries that Savills analysed are enjoying increasing investment activity this year. Italy (54%), Sweden (33%), Poland (15%), the Benelux (12%), and Finland (479% - due to some sizeable portfolio and retail transactions) have all performed well, proving 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% yoy. This was driven mainly by transactions in the logistics and distribution sector in the UK, Germany, Sweden, Spain and The Netherlands, which account for more than 80% of the total activity.
Over half of the markets across the continent did record a decrease in transaction volumes in Q1. Lower volumes were observed in the markets which are ahead in the investment cycle such as: the UK (-48%), France (-47%) and Germany (-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.
Eri Mitsosterigiou, Director of European Research at Savills, comments, "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."
On the other hand, Denmark (-62%), Norway (-47%), Spain (-24%) and Ireland (-33%) all experienced dynamic investment activity in 2015, therefore it is unlikely for them to rival these strong performances in 2016.
Marcus Lemli, Head of European Investment, Savills, comments: "The markets that we believe will 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."
Savills predicts that in 2016 prime CBD rents will grow by 3-4% pa in London, by 3.5% in Paris and by 2% in the big four German 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," comments Eri Mitsosterigiou. "These include the Nordics, the peripheral markets and the Benelux countries, where transaction volumes are still rising. 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."
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% yoy in Dublin and 6.0% 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," says Marcus 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."