RCA: benign 2018 picture masks structural changes sweeping Europe

Global geopolitical concerns feeding through into economic sentiment weighed on European real estate investment in 2018, but investors’ spirits do not yet appear to be dented by robust pricing while equity is plentiful.

Tom Leahy, Real Capital Analytics’ Senior Director of EMEA Analytics, explained:

“European real estate markets continued to roll through 2018, albeit at a slower pace, but even as geopolitical and economic headwinds such as U.S. rate rises, hard Brexit fears and US/Chinese trade tensions blew harder, fourth quarter volumes were still the fourth highest on record. Accommodation and industrial property investors, those in ‘beds and sheds,’ will continue to spend through 2019, but as Europe’s major economies stutter, it is likely overall investment volumes will slow.” 

Real Capital Analytics’ data shows total European property investment volume was €277.7bn in 2018, slipping -15% over the previous 12 months, with the value of transactions still surpassing the €250bn-level for the fourth year in a row. Fourth quarter volume was down 23% over the same period in 2017, but the last three months of 2017 was a record three months for the market.

The benign overall investment picture masks mixed fortunes and structural changes within European real estate markets:

  • Germany overtook the UK to become the number one European market last year;
  • the UK retail sector dragged activity (with just 344 properties changing hands) to record the slowest quarterly finish to a year since 2012;
  • by contrast, the retail sector in Italy, Spain, Poland and Portugal continues to attract capital;
  • across Europe, accommodation assets – including apartments, student housing and hotels – now comprise almost 30% of all investment volume, double the sector’s 2007 peak;
  • industrial/logistics hit a record level of transactions in 2018 for single asset and portfolio deals on the back of the e-commerce wave;
  • in Dublin, €725m was spent on development sites, equal to the previous three years combined;
  • in Frankfurt, more than €11bn was invested last year – including nine €250m-plus office transactions over the last 12 months, the same as the previous three years combined double the 10-year average;
  • Europe was broadly equally split between domestic and overseas buyers’ capital; and
  • inward global capital flows from outside Europe dropped, while the European share of the worldwide real estate investment pie also fell back back.

Investors are responding to signs of a maturing market cycle and the potential geopolitical storm clouds on the horizon by holding back from chasing higher returns.

Leahy concluded:

“Proceed with caution in 2019 seems to be the main message to European real estate investors from RCA’s latest transactions data. GDP growth across the Eurozone was at a four-year low in Q3 2018, Q4’s flash estimate shows no improvement, and the EU’s benchmark European Economic Sentiment Indicator has turned down. There is a strong correlation between the ESI and real estate investment volumes, so if economic sentiment continues to fall it is likely property transactions will follow suit.” 

james.wallace@realassetmedia.com