As Brexit talks continue, the EMEA (Europe, the Middle East and Africa) commercial real estate market is expected to extend its current robust market fundamentals into next year with the UK, France and Germany regarded as investors’ preferred destinations.
EMEA is on track for full-year transaction volumes to exceed 2016’s US$246 billion by as much as 10 percent, according to data from JLL, with deal volumes in London possibly reaching a record despite Brexit uncertainties. In the first nine months of the year, investment volumes in the region totalled US$183 billion, a 14 percent increase on the same period last year. Notably, in the UK, volumes were up 28 percent in the period and in Germany, they rose 9 percent, although in France, volume declined 17 percent, due to a lack of supply.
According to JLL’s Capital Markets team, there’s still a lot of confidence in the European market as prime yields remain supported.
With more demand than supply in the region, investors are seeking to increase their exposure to all asset classes with a greater focus on logistics. European warehousing take-up has reached a new record so far this year, spurred by improved EU economic growth coupled with strong online sales growth, automation and the need for further city logistics networks.
Investors want real estate exposure
The positive sentiment in the commercial real estate market was also reflected in the latest PWC’s “Emerging Trends in Real Estate: Europe 2018” survey. Nearly half of the respondents in the survey expected European economic growth to improve over the next five years. In a separate study by BrickVest, 40 percent of institutional investors indicated that they intended to boost their real estate exposure, especially in European commercial real estate, over the next year.
Based on JLL’s data, current yield in the core London office market is about 4.25 percent, with Paris registering 3.25 percent and Berlin at 3.5 percent.
Historically, the UK, France and Germany have attracted most of the investment demand within Europe primarily due to high market liquidity, their stable economies and established domestic institutions such as pension and insurance funds, says Gemma Kendall a Director in JLL’s EMEA Capital Markets team.
The UK particularly is seen to be in a recovery mode following a post-referendum dip in 2016. A Director in JLL’s UK Capital Markets team, Tim Graham says that London, in particular has been a star performer this year with investment volumes jumping 120 percent year-on-year in the third quarter. Year-to-date transaction volumes are up 48 percent, already overtaking the 2016 full-year total while London West End posted its highest quarterly leasing volume on record.
“While there is continuing political uncertainty in the UK, at a global level, investors have confidence in the future of the market, and believe it will be resilient in the coming years post-Brexit,” says Graham. He noted that investors had been seeking more medium to long-term income profiles to help mitigate the relative short-term uncertainty. “When you look at yields for longer-term income, they are trading at a c 200 basis point premium to the respective UK gilt rate. As a result, we’re seeing record low yields being achieved for best in class assets which offer long term security,” he says.
Value-add properties lure buyers
The premium pricing being achieved on core assets, has led to an increased appetite for value-add opportunities. “Investors feel they can benefit from focussing on strategic locations near upcoming infrastructure projects such as Crossrail. These areas are due to benefit from increased rental growth and offer higher risk adjusted returns than long dated income streams,” says Graham.
By comparison, the demand focus in the broader European market is similar, observed Kendall. “Value-add buildings are receiving a strong depth of bidding, particularly due to the rising rental levels across Europe. In some cases, the number of bids has exceeded that of core, fully leased buildings” she says. “Investors are looking at value-add opportunities that are well-located with defensive business plans and positive leasing prospects.”
The investment momentum in the region was supported by a strong leasing market and attractive financing, says the JLL executives. In Germany, Frankfurt posted one of the strongest quarters in the last 10 years. In Greater Paris, take-up has reached 1.8 million square metres in the first nine months of 2017, 2 percent up on the same period in 2016, with good momentum for larger units over 5,000 square metres. The expansionary demand across Europe has led JLL to increase its full-year 2017 forecast by 3.5 percent to 12.2 million square metres, 11 percent ahead of the 10-year average.
On financing, institutional investors, who have struggled to place their funds in a particular market because of keen competition, have widened their criteria to gain exposure to real estate, says Graham. “Certain investors are increasingly looking at getting exposure through the debt market, and there is an increasingly wide pool of lenders which is giving borrowers the benefits of a competitive debt market.”
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