Europe’s commercial real estate investment slows in H1 as U.S. institutions, sovereign wealth funds hit the brakes

Investment in European commercial real estate slowed in the first half of 2018 as high prices were among the factors that led investors, including sovereign wealth funds and U.S. institutions, to scale back their direct property acquisitions, according to research by Real Capital Analytics (RCA).

Transactions completed in January through June totaled €109.8 billion ($128.1 billion), a 19 percent decline from the same period a year earlier, data compiled by RCA showed. No sector escaped the slowdown, which affected 14 of Europe’s 20 most active national markets. Sovereign wealth funds accounted for 0.2 percent of Europe’s total investment volumes in the first half, compared with a 4.5 percent share for the whole of 2017.

Tom Leahy, RCA’s senior director of EMEA Analytics, said, “These are the weakest investment levels by sovereign wealth funds since 2010 and they were not alone. RCA’s data for the first half show that most major sources of capital were less active and U.S.-headquartered investors as a group were net-sellers. Our indicators show that pricing in the core Western European markets is well above the previous peak, reached in 2007.”

Europe’s two most active markets, the United Kingdom and Germany, recorded declines in investment volumes of 11 percent and 31 percent, respectively, in the first half. The pair accounted for 48 percent of total investment activity in Europe. Nevertheless, RCA’s research found pockets of strong activity that defied the broad slowdown across European commercial real estate investment markets.

The Netherlands, which lagged behind other markets in its recovery from the financial market crash of 2008 and the euro zone crisis, continues to attract strong investment following a record year in 2017. It was Europe’s fourth most active market in the first half of 2018 with €9.8 billion ($11.4 billion) of transactions, a 17 percent increase from the same period in 2017.

A major driver of activity in the Dutch market was the residential rental sector. This follows rules introduced in July 2015 that oblige housing associations to focus on lower-income social housing, prompting their withdrawal from the free-market rental sector. A housing shortage and a booming home sales market have attracted investors to the sector.

The country’s largest transaction of the first half was Vesteda’s €1.5 billion ($1.75 billion) purchase from insurer NN Group of a portfolio of 5,983 units plus 794 more to be developed. The largest single-property deal was Greystar’s €170 million ($198.4 million) sale of the Maastoren office building in Rotterdam to a consortium led by FOM Real Estate.

Another feature of the acceleration in the Dutch market has been activity in the hotel sector. The largest deal of the first half was the €164 million ($191.4 million) purchase of the Kimpton De Witt hotel in Amsterdam by Global Holdings, owned by Israeli billionaire Eyal Ofer.

Other active European markets included Lisbon, which jumped to 13th place from 53rd in 2017 as a result of some larger deals, including Blackstone’s portfolio sale of a retail park and two shopping centers to Immochan for a total of more than €400 million ($466.9 million).

Elsewhere, transaction volumes in Ireland’s market grew 84 percent to €2.5 billion ($2.9 billion) in the first half from a year earlier, following a surge in purchases of rental apartment blocks in Dublin. The largest of these deals was AXA IM Real Assets’ €161 million ($187.9 million) purchase of The Grange and four acres of adjacent development land in Sandyford, through its private rental sector (PRS) joint venture with Kennedy Wilson.

Housing supply in Dublin is not keeping pace with population growth as multinational companies locate to Ireland, bringing high-quality jobs to the city. The largest single-property deal in Dublin was Google parent Alphabet’s forward purchase of a new office complex to be developed at Bolands Quay for an estimated €300 million ($350 million).

While the general slowdown in Europe has masked these hotspots, the number of deals pending completion suggests that overall activity will probably pick up. RCA has identified €33 billion ($38.5 billion) of such transactions, the second highest “pipeline” of potential deals that it has recorded.

RCA’s Leahy concluded, “We should see an improvement in the second half, although it’s very unlikely that we shall see a repeat of the record final quarter of last year. Real estate continues to appeal to generalist investors, who are looking for income-producing assets. Property is expensive in core markets in historical terms, however, so investors will have to focus on adding value through asset management or targeting markets and sectors where rental growth prospects are good.”