2018 European property investment volumes on track to meet 2017 levels

Commercial real estate investment volumes across Europe are currently on course to meet 2017 levels, according to Savills, after first quarter 2018 was broadly in line with the long-term average.

“In spite of softer investment activity during the first quarter, at the moment we expect 2018 full-year turnover to be in line with last year's volume at approximately €242 billion [$280 billion],” says Marcus Lemli, head of Savills European investment. “European prime real estate remains an asset class of choice due to attractive yield spreads over long-term interest rates and positive rental growth prospects, and offices will continue to be the preferred destination, although investors’ appetite for alternative assets will persist.”

Following fourth quarter 2017, one of the strongest quarters on record, commercial investment totaled €46 billion ($53 billion) across Savills’ survey area in first quarter 2018, down 8 percent compared with the same period in 2017 but broadly in line (down 3 percent) with historic trends, despite the traditional volatility of first quarters.

Poland (up 329 percent), Belgium (up 248 percent) and Luxembourg (up 144 percent) all saw volumes increase in the first quarter, says Savills. In Poland, the sale of a €1 billion ($1.2 billion) retail portfolio gave first quarter volumes a boost, and in Belgium a number of large deals carried over from fourth quarter 2017 to first quarter 2018. The United Kingdom, Germany and France remain the dominant markets for investment, collectively accounting for 63 percent of activity, says Savills.

The biggest falls in activity were recorded in Romania (down 81 percent), the Czech Republic (down 77 percent) and the Netherlands (down 53 percent). Savills says this can be partly attributed to the Czech Republic and the Netherlands both experiencing investment activity well above their long-term averages in 2017 and that the fall in volumes may be a sign of investors taking a breather in the first quarter before resuming activity later in the year.

The amount of overseas money invested in the region also remained unchanged in the first quarter, says Savills, with international investors accounting for approximately 30 percent of all cross-border transactions, although the allocation per asset classes and geographical destinations has become more pronounced depending on the origin of investors.

Destinations of global money invested in Europe over the past two years

Source: Savills

Overall European office yields are at historic lows due to continued strong demand, says Savills. Prime CBD office yields tightened 22 basis points on average, year-over-year and are now at 3.86 percent, with the highest movements compared to first quarter 2017 in Frankfurt (down 70 basis points), Amsterdam (down 60 basis points), Lisbon (down 50 basis points), Helsinki (down 50 basis points) and Berlin (down 50 basis points). According to Savills, due to the lack of prime office space available in central locations, secondary CBD office yields and prime non-CBD office yields also are under strong downward pressure. On average across Europe, they moved in by 32 basis points to 4.93 percent and 37 basis points to 4.91 percent, respectively. Prime retail warehouses experienced the highest yield compression of all sectors at 39 basis points on average.

“Prime office yields will remain stable in core countries but will continue hardening in other parts of Europe, notably CEE and southern European countries. The yield gap between asset classes and locations will continue closing, but prime products will remain the main targets for investors,” says Lydia Brissy, director in Savills research team.