Germany unseats UK as top CRE investment market in Europe

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As we reported here in REFIRE back in November last year, Germany edged ahead of the UK as Europe's most active real estate investment market in last year's third quarter for the first time since 2012. Fresh research from Real Capital Analytics (RCA) now confirms that Germany finished the year as the continent's biggest market, as caution towards the UK market rose following the Brexit vote.

According to Tom Leahy, RCA's senior director of EMEA Analytics, "Germany replaced the U.K. as the destination of choice for real estate investors in Europe following the Brexit vote in June and as Europe faces potentially more political, economic and monetary upheaval later this year. The final three months of last year were, nevertheless, the third strongest quarter on record, which shows the underlying strength of the broader market. National real estate markets across the region are at different stages of the investment cycle and this disparity, as well as some county-specific issues, explains the mixed picture for Europe last year."

Commercial property deals completed in Europe last year totalled €254.6bn, a 21% drop from the record year of 2015, RCA data show. The slide in overall investment was due chiefly to the weakness of the three largest markets: transaction volumes fell in Germany by 19%, by 43% in the UK and France suffered a 21% fall. A similar pattern occurred in the fourth quarter, when overall European investment volumes declined by 14% from the same period a year earlier, to €78.5bn.

While the value of German properties that exchanged hands last year fell to €58.8 bn, the market itself was as active as 2015 in terms of the number of deals that completed. One reason for the lower average deal size in Germany last year was the reduced M&A activity in the listed sector following the creation of Vonovia, via the €3.9bn combination of Gagfah and Deutsche Annington, in 2015.

Low or negative interest rates have driven up pricing for properties in Germany’s Big Six markets, increasing the appetite for project developments as banks loosen their lending criteria for project finance, RCA's research shows. Sales of development sites in a number of the major German metropolitan markets increased in 2016, bucking the trend nationally and Europe-wide.

In the UK, Europe’s largest investment market over the last 10 years, transactions for October through December fell 45% from the fourth quarter of 2015 to almost €14.3bn. Amplifying the slide was the depreciation of the pound following the Brexit vote. In local currency terms, the drop in investment was 35% last year.

"Europe starts 2017 with a patchwork of markets that are at differing stages of the investment cycle, which presents opportunities for those with a strong grasp of the local market dynamics. We also note a mood of greater caution before elections in France, Germany and the Netherlands that may present some surprises, while the steady uptick in inflation means that central banks may start to review ultra loose monetary conditions," said Leahy.

"A very strong fourth quarter shows that investors are still intent on deploying capital and we expect that core markets, as well as those with income-focused, defensive qualities like logistics, student housing and private-rented residential accommodation will remain in strong demand, as will markets where opportunities around mispricing arise," said Leahy.

In November we quoted him also as saying, “The rise of alternatives, which offer investors higher yields on longer leases with some exposure to operational risk, illustrates how investors are looking outside the traditional sectors for opportunities in the prevailing low interest rate environment. The steep rise in pricing for Grade A assets in Europe’s gateway cities has also led them to look for prime assets in the next-ranking locations, a pattern that we anticipate to continue at this stage of the cycle."