Spain shines as Southern Europe’s star performer with cross-border capital driving investment volumes to post GFC peak

Spain has been leading the recovery of Southern Europe’s commercial real estate market since the Great Financial Crisis (GFC), due to continued interest from foreign investors who have been responsible for 62 percent of all commercial real estate investment activity so far this year, according to Savills.

Investment volumes are looking to hit €8.9 billion ($10 billion) this year, a year-over-year increase of 5 percent, and a post GFC record.

This positive sentiment has spread to both Italy and Portugal and it is now extending to Greece and Cyprus. After years of weak investment activity, the investment volume across southern Europe has increased by 277 percent in 2017, compared to the bottom low of €5.2 billion ($6.1 billion) registered in 2012.

According to Savills, the total volume is up 8 percent year-over-year and southern European markets now account for 10 percent of total E.U. investment volumes, compared to 5 percent in 2012.

“Positive economic growth, falling unemployment rates and renewed consumer confidence are luring investors back to Southern Europe,” said Alice Marwick, associate, Savills European Research. “There are marked differences between the region’s countries, but they do share some key traits. Importantly, all of them depend on cross-border capital flows; so far this year foreign investors have accounted for 70 percent of all activity in southern European countries, compared to the E.U. average, where cross-border investors typically account for 52 percent of the total volume.”

Savills has recorded that European and U.S. funds are the dominant cross-border players, accounting for 37 percent and 38 percent, respectively, of overseas investment. In Spain, the majority of cross-border capital has been invested into retail assets (48 percent). In Portugal, retail has been attracting foreign investors’ interest since 2012; however, this year offices have overtaken retail with €372 million ($438 million) invested compared to €352 million ($414 million) retail investment.

“Additionally, the factor that links the countries in the southern European region is their booming tourist industries, with Barcelona, Milan, Rome and Madrid amongst the top 10 European destinations for overnight international visitors,” said Marwick. “Notably, Lisbon is one of the fastest growing European tourist destinations in terms of annual growth and due to this trend, and the noted rise in consumer spending, investors will increasingly target high street retail and hotel assets in these locations.”

Savills has recorded that Spain is the third-largest tourist destination in the world, recording an annual increase of 10.3 percent, but Portugal is also seeing growth as Chinese visitors alone have gone up 19 percent in the last year. In Greece, the travel and tourism sector represents 18.6 percent of GDP and although the Greek market, unlike the rest of the region, is still dominated by domestic investment, as economic fundamentals improve, international investors will be on the look out for opportunities within the hospitality sector.

“As Spain’s recovery has superseded that of the rest of the region and as the supply of distressed assets becomes limited, investment opportunities are becoming increasingly prevalent in Portugal, Italy and Greece,” suggested Marwick.  “Furthermore, while investment volumes keep growing in Spain, both office and retail yields are at record lows — 3.25 percent and 4.25 percent, respectively — and continue to compress due to lack of product and high demand. In the core market there is now little opportunity for proper returns, although there is some scope for rental growth.”

Luis Espadas, Head of Capital Markets, Savills Spain, added, “As demand for the traditional asset classes in Spain grows, investors will turn their focus to alternative asset classes. These markets, such as student housing and senior living, may be small at the moment but there is room for yield movement and more attractive pricing differentials. In addition, the growth of e-commerce in Spain will lead to increasing demand for logistics and warehouse space, which has so far been lagging behind Europe’s core markets. However, it’s worth noting that retail is still an extremely popular asset class in Spain. 2017 was the first year in which retail investment volumes were the highest across all the property sectors.”