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European Commercial Property Investment Has Strongest First Half Since 2007 as London Hits Record

Real Capital Analytics / August 8th, 2015

London, August 3, 2015 — Europe’s commercial real estate investment market has had its strongest first half in eight years, putting it on course to eclipse the annual record level attained at the tail-end of the last market boom in 2007 by December, analysis by research firm Real Capital Analytics (RCA) shows.

Unprecedented transaction levels in London, plus strong increases in the Nordic region, the Iberian peninsular and Italy, powered Europe’s €135.3 billion of investment activity in the first six months of the year — a 37% rise compared with the first half of 2014. The growth in investment in the first three months of 2015 continued into the second quarter, when there was a 16% rise from the same period a year earlier to €65.5 billion.

Simon Mallinson, RCA’s Managing Director for EMEA & APAC, said: “Europe may surpass the record set in 2007 as real estate continues to attract a broad range of investors looking for higher yielding assets. Eight years ago, activity slowed in the second half as the credit crunch began to bite and escalated into the full-blown Global Financial Crisis. Historic low interest rates, reduced levels of leverage and the broadening investor base mean that market conditions are currently very different from then.”

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A string of substantial portfolio sales propelled investment in London to €28.9 billion in the first half, an 86% rise from a year earlier, enabling it to overtake New York City as the world’s top destination for real estate investors. Notable transactions included Brookfield and Qatar Investment Authority’s €3.6 billion takeover of the Canary Wharf estate as well as

QIA’s purchase of three luxury hotels – The Berkeley, Claridge’s and The Connaught – for an estimated €2.2 billion.

The British capital is head and shoulders above any of its rivals as the destination of choice for real estate investors in Europe, RCA’s first-half data show: London racked up the equivalent amount of investment as the seven next most active cities combined. London is also the world’s biggest real estate market for cross-border investors, attracting almost four times more capital than next-placed Manhattan Island in New York, RCA’s research shows.

Large portfolio purchases also lay behind the 63% increase in investment in the Nordic real estate markets, which registered €15.5 billion of transactions in the first half. These included Citycon’s €1.47 billion acquisition of Norway’s second-largest shopping centre owner and manager, a Starwood Capital fund’s purchase of a portfolio of properties in Sweden and Norway for a sum in excess of €1 billion and Partners Group’s €423 million purchase of 30 retail properties in Norway.

There was almost a six-fold increase in activity by value in Norway in the first half from a year earlier as a result of these large transactions. Denmark and Finland each had more than a 60% growth in investment activity, although Sweden dipped 7%, RCA data show. The transactions momentum in Nordic markets is set to continue following Blackstone’s announcement in July of a €2.4 billion purchase of real estate in Norway and Sweden from 10 funds advised by Obligo.

Tom Leahy, RCA’s Director of EMEA Analytics said: “The Nordic region appeals to international investors because it is made up of small, wealthy and dynamic economies with core investment characteristics. The weaker Norwegian krone, pressured by falling oil prices, has made real estate there particularly attractive. International investors are buying portfolios to scale up in these markets because there is less competition for large transactions from domestic or regional players, who tend to dominate the regular deal flow.”

The Norwegian krone depreciated by 29% against the dollar in the 12 months to the end of June 2015 as a result of the slide in the price of oil, of which Norway is a major producer. Exchange rates also lay behind the 12% decline in investment in the Swiss market following the central bank’s decision in January to abandon its currency cap, which led the franc to appreciate by 14% against the euro by the end of June.

Of Europe’s larger “core” markets, Germany had a 35% increase in transaction volumes in the first half to €29.1 billion while the Dutch market grew 30% to €5.91 billion by offering higher property yields and as government reforms encouraged housing associations to sell market-rate rental stock to institutions. France, Europe’s third biggest real estate investment market after Germany and the U.K., registered a 17% decline in activity in the first half to €10.6 billion. Last year’s numbers were inflated by Lone Star’s €1.2 billion acquisition of the Coeur Défense office complex in Paris while there was a 48% decline in activity in the French capital during the second quarter.

Italy, Spain and Portugal registered the fastest growth rates in Europe as sovereign wealth funds acquired trophy buildings and mainly U.S.-based private equity firms targeted the Eurozone periphery for opportunistic purchases. Italy registered a 169% jump in transactions to €5.64 billion in the first half, activity in Spain grew by 87% from a year earlier and Portugal recorded more than a nine-fold surge from a low base to €1.27 billion, RCA’s data show.

RCA’s Mallinson concluded: “Ultra low interest rates are causing immense amounts of global capital to flow into commercial real estate in Europe. Investors appear comfortable that pricing provides a sufficient cushion for the moment when benchmark interest rates rise and are sanguine about the risks posed by the unspectacular growth outlook. It’s going to take a substantial shock to slow down this bull market, which is on course to enter the record books.”

The European Capital Trends report also revealed:

  • Investment in European residential properties more than doubled in the first half from a year earlier to €21.6 billion, making it the fastest-growing sector tracked by RCA.
  • Madrid returned to the Top 5 investment markets for the first time since 2008.
  • London and Manhattan accounted for 11% of first-half global investment volumes.
  • At 5.1%, prime offices in Paris yielded 420 basis points more than 10-year government bonds at the end of June, the widest spread available of the world’s six largest markets (London, Tokyo, Manhattan, Hong Kong and Singapore).
  • The €827 million purchase of the ‘Jenga’ Tower development in London’s Vauxhall by
  • Dubai’s Damac Properties was the largest single building transaction in Europe in the second quarter.
  • CEE markets fell 11% from first-half 2014.