RCA: European CRE investment activity slumps to a six-year low in Q1

European commercial real estate investment transactions slid to the lowest level in six years in the first quarter of 2019, according to new data from Real Capital Analytics, as slowing economic growth and political uncertainty weighs on markets with high pricing and lack of product stifling sentiment.

Investment deals totalled €44.5 billion between January and March, which reflects a 32% decline compared to the same quarter last year and at the lowest level since 2013, Real Capital Analytics’ Europe Capital Trends Q1 report shows.

The total was also well below the €71 billion average in European transaction volumes in recent first quarter periods.

Source: Real Capital Analytics

Despite apartment investment volumes being relatively weak in the first three months of the year, the sector continued to pull ahead of plummeting retail transactions. This trend first became apparent in the second-half of 2018 and signals the passing of a significant residential milestone for European real estate markets.

The apartments sector appears to be entrenching its position as the second largest European property investment market after offices, while retail volumes crashed to a 10-year low in the first quarter. Retail investment activity plummeted 62% year-on-year and was particularly dire in the UK where transactions recorded the lowest level ever.

Tom Leahy, RCA’s Senior Director of EMEA Analytics, explains:

“Deal volumes in the European apartments sector overtook retail in the second-half of 2018 for the first time. Residential real estate has now consolidated its lead in the first quarter of 2019 as the second largest investment market after offices. Investors appear to be voting with their capital in favour of alternative property asset classes and particularly residential over retail. The inroads made by e-commerce into the market share of physical stores has undermined retail’s previous reputation as the stable rental income producing mainstay of investment portfolios.”

The European residential investment market is also broadening geographically and

increasingly attracting cross-border capital flows. Apartment investment volumes were at a record level in the Netherlands, Ireland, Portugal and Belgium over the last 12 months.

At a country-level, the Brexit saga continues to impact on investment volumes in the UK, with the first quarter of the year the slowest for transactions since 2016. The market has largely bifurcated. Demand for hotels, apartments and senior housing is above the recent average, whereas investment in the core commercial parts of the market was down by 50% in the first quarter versus the average over the last three years.

London did, however, buck the wider trend across the top European metropolitan markets, as investment volume rose in the first quarter, compared with a year ago. This was chiefly due to the acquisition of the new Goldman Sachs headquarters by LaSalle on behalf of South Korea’s NPS. At £1.2 billion (€1.3 billion), this was the second highest price ever paid for a single asset in London. Even without this deal, parts of the city’s market remain relatively buoyant, notably in the alternative property sectors, with close to €1.6 billion of hotels and €832 million of apartment buildings trading.

james.wallace@realassetmedia.com