Investment volumes in the European property sector have increased relatively steadily since 2009. The current economic boom is the second-longest ever and despite some indications of a future cooldown, the drivers of continued allocation of capital to the property sector still seem strong.
The European economy demonstrated good resilience during the past year despite political and macroeconomic uncertainty. The current economic boom is the second-longest ever, but forward-looking economic forecasts indicate a moderate cooldown. Historically low interest rates have led to a significant inflow of capital in the property market and have driven prices up to record levels, especially in larger cities. When interest rates are raised, the conditions for financing are affected and, to a considerable extent, capital is commonly reallocated from riskier investments in favour of more stable real estate investments with dividend yields and fixed income investments. Nevertheless, the drivers of continued allocation of capital to the property sector still seem strong.
- After an upturn in 2017, the European commercial property market levelled off somewhat in 2018. Transaction volumes decreased by 18 percent to EUR 227.8 billion. 2018 was largely another good year and prices have continued to grow in most segments. There is still plenty of equity, markets are not yet overbuilt, and attitudes to debt have become more conservative since the Global Financial Crisis.
- Several structural trends shaped how investors allocated their capital across the sectors in European real estate in 2018. These included the decline of retail in some key markets and the emergence of logistics as the most in-demand sector. The office property market is still attracting the most capital, with a transaction volume of EUR 112.9 billion last year, followed by retail and industrial/logistics properties.
- Regarding the average values of our analysed countries and markets in Europe, the average commercial transaction volume amounts to EUR 11.65 billion. Only three countries (UK, Germany, France) clearly exceed this value and account for the majority of total transaction volume in Europe, reflecting the size, transparency and maturity of these markets. On the other hand, there is a good diversification potential among European locations, with some metropolitan markets providing higher yields than the average of 3.75 %.
- Tallinn, Warsaw, Luxembourg, Helsinki and Brussels achieve attractive yields with still some growth potential in prime rents. It is also visible that the majority of specified markets will see stable prime yields on the forecast horizon 2019-2021, mainly due to increase of the refinancing rate.
The uncertainty surrounding the outcome of Brexit negotiations is generating some nervousness, particularly among European investors. There has been a tendency of some investments being postponed until the outcome is decided. Although there is a general belief that the outcome may lead to fewer investments in the UK in the near future, few have any doubts about the long-term status of the region. On the contrary: For investors with a healthy understanding of risk, the London real estate market appears to be attractively valued. The market is expected to maintain its top ranking for willingness to invest in 2019. This longest real estate boom of the post-war period to date continues for the time being. We do not see the often postulated end of the cycle. Investors should therefore remain in the market while maintaining their rationally defined investment strategies.