London remains top European city for real estate investment
The top three European cities for real estate investment remain unchanged year-on-year, with London benefitting from three times the investment volumes of either Paris or Berlin which are firmly second and third, according to Colliers International’s Capital Flows: Developing Not Cooling report.
Following year-on-year increases in commercial real estate investment volumes in Germany, Frankfurt has also risen to the fourth most active city. Madrid and Barcelona have also witnessed significant year-on-year increases in city rankings moving from eighth to fifth and from 23rd to 17th most active cities, respectively.
“We are heading towards the growth end of the property cycle in Europe and we are seeing investors strategise and evaluate how to get stable returns in two to three years’ time in case there was a downturn,” said Richard Divall, head of EMEA cross-border capital markets at Colliers International. “Secure income is popular and traditional strategies of buying in prime locations in liquid markets as well as property asset classes driven by global mega trends such as urbanization and ageing population, are attractive.”
Real estate investment managers are bringing in winds of change as well. Of the investors themselves, Divall said, “Investment managers are having an increasing influence over investment volumes, which is a big change since the last cycle when funds dominated the space. Investment managers including Patrizia; CBRE GI; Amundi; Invesco; TH Real Estate and M7 now account for over 30 percent of investment activity compared to only 19 percent ten years ago. This is changing the nature of investment, enabling it to be more active and nimble. Investment banks are no longer a feature in the top 20 most active investors globally, yet they accounted for five of the top ten in 2007. The only consistent player is Blackstone.”
“Since the EU referendum, there has definitely been a wave of capital moving to the continent; but this has largely been yield driven,” said Divall. “Prices are clearly aligning with only a 200 basis points spread across the major European city markets. Many German cities now trade at prime yields lower than that of the London West End. Our analysis of the embedded occupier strength of markets continues to put UK cities in the top ranking markets, which could see capital redistribute once more.”
Capital may be consolidating, but the way it is being spent in Europe is diversifying by sector. Residential is again the consistent grower and performer, accounting for around 15 percent of all activity in the first half of 2017, some 2.5 times its market share in 2007. This still hasn’t reached the equivalent levels in North America, suggesting that there is room for further growth, said Divall.
Divall points out that another notable shift is investment into development and forward funding of projects. All the top cities have seen significant deals close on assets under construction, particularly for offices. Proportionately, offices have claimed back some ground over other sectors in first quarter 2017, even though volumes have shrunk marginally. Given the lack of modern, large-scale office space in many European cities, further investment into development is likely to drive the cycle on in 2018, especially when yields for standing assets remain so low, according to Divall.
