Germany now Europe's top commercial property market

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Germany edged ahead of the UK in the ranking of Europe's most active markets for commercial real estate investment in the thrid quarter for the first time since 2012, following the uncertainty unleashed on the UK market following the Brexit vote in June, according to research from Real Capital Analytics.

The UK market slid 51% to €10.0 billion of completed commercial property transactions in July through September compared with a year earlier, according to RCA’s data. The drop was magnified by the pound’s depreciation over the period, and made it the weakest three-month period for the British market since Q2 in 2012. At the same time the UK’s share of Europe’s transaction activity was the smallest by value in six years. Germany’s investment volumes totalled €13.6 billion in the quarter, a 34% drop from a year earlier.

According to Tom Leahy, RCA’s Director of EMEA Analytics, “The uncertain outlook following the Brexit vote has compounded the slowdown in the U.K. market, which peaked a year ago. Across Europe the investment cycle has reached a stage of maturity after the record year in 2015, which is causing investors to shift their focus towards second-tier locations or ‘alternative’ real estate sectors such as hotels, student accommodation and healthcare. This is taking place against a backdrop of ultra-low interest rates and caution in face of a number of global economic, financial and social risks that have caused overall investment activity to slow.”

The total value of commercial property transactions completed in Europe during the third quarter was €46.0 billion, a 38% drop from a year earlier, RCA data show. That took overall investment volumes to €163.0 billion for the first nine months of 2016, which was 29% lower than for the same period in 2015.

With strong competition for assets in the core locations, RCA’s analysis of the German market showed that investors have been turning to locations outside the country’s Big Seven cities. Leipzig, for instance, registered more than €1 billion of transactions to date in 2016, a level of investment never recorded before in an entire calendar year for the city in Eastern Germany. While the number of transactions in Germany was little changed from last year, smaller lot sizes and no repeat of 2015’s substantial portfolio transactions and corporate takeovers accounted for the lower sales volumes by value, RCA found.

Investors have been turning to second- and third-tier cities in Europe, which they perceive as offering better value. Investment levels in Helsinki, Rome, Utrecht, Zurich, Bristol, Liverpool, Malmo and Dresden were all at more or close to the double of the average rate during the first nine months of 2016, RCA data show. South Korean investors, for example, have invested more than €3 billion so far this year in Europe, with notable purchases in Rotterdam, Vienna, Edinburgh and Brussels.

Another trend to emerge in 2016 is the record level of investment in hotels and other “alternative” real estate sectors, including student housing, data centres, healthcare facilities and senior housing. The share of total European transaction volumes by these specialist real estate sectors was a combined 18%, an all-time high according to RCA’s data. Notable transactions included more than €1 billion of purchases by Primonial in assisted living facilities in Germany. The hotel sector also registered a 15% rise from a year earlier in transaction volumes in the third quarter to €4.1 billion, the only sector to gain from a year earlier in the quarter.

RCA’s Leahy concluded: “The rise of alternatives, which offer investors higher yields on longer leases with some exposure to operational risk, illustrates how investors are looking outside the traditional sectors for opportunities in the prevailing low interest rate environment. The steep rise in pricing for Grade A assets in Europe’s gateway cities has also led them to look for prime assets in the next-ranking locations, a pattern that we anticipate to continue at this stage of the cycle.”