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December 7, 2016

Political surprises aside, two storylines standout in the European real estate investment market as we reach the end of 2016.

Firstly, the UK has decoupled from the wider European market, making it difficult to compare with the rest of Europe. Secondly, the political surprises – namely, Brexit – has had little effect on continental European real estate markets. Total volumes reached €145 billion at the end of Q3 2016; that’s compared with €159 billion by the same point in 2015, a 9 percent decline year-on-year.

However, with the UK excluded, continental Europe is 6 percent up on last year across three quarters. Germany and France remain flat, both reporting volumes near the record levels of investment seen last year. Meanwhile, the CEE region has emerged as the year’s star performer with investment volumes totalling €6.9 billion – the highest ever recorded in the first nine months of a year.

The UK investment market has been the major outlier in 2016 in £30.3 billion total investment volumes by the end of October 2016. This is similar to levels of investment reported in 2013. Investors have polarised opinions regarding the UK market and its future in 2017 with some investors waiting for the markets prices to stabilise.

Germany has remained the most sought after European market this year, reporting higher levels of investment than the UK this quarter. The weight of demand in the German market is supported by a strong domestic investor base and growing international interest non-domestic investors took a 46 percent share in 2016. As continental Europe’s core market, Germany has been the key benefactor of increasing allocations to the sector from institutional investors. As a result, yields for prime assets in prime locations have compressed to 3.71 percent – the fastest rate of compression seen in two years. Looking forward, demand for German assets looks sustainable, even at new lower levels of returns, as relative attractiveness of real estate in the market persists. The main problem in 2017 will be sourcing assets.

In France, total commercial real estate investment was at €17.1 billion at the end of Q3, three percent above the figure recorded by the same time last year. France, more specifically, Paris, is increasingly on the radar of international investors, even despite current prime office yields at just three percent, largely thanks to numerous positive movements in the occupier market. Firstly, take-up in Paris is up 17 percent over the last four quarters (year-on-year). Secondly, occupier expansion is improving with Paris CBD and other districts reporting over 5 percent net expansion over the past four quarters. And prime rents are set to grow by 2.2 percent over the next three years.

History tells us that there is further room for investors to generate income if the occupier markets continue to perform. And that should be at the front of investors’ mind as they speculate on European real estate heading into 2017.

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Richard Bloxam

Richard Bloxam, Head of EMEA Capital Markets, JLL

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