RCA: Brexit risk aversion triggers 31% fall in UK property investment in H1

Escalating concerns over the economic impact of Brexit drove the volume of property investment transactions in the UK down by 31% year-on-year in the first-half of 2019 to €23.4 billion, according to Real Capital Analytics.

Investment in European commercial property fell again in Q2, although the decline was shallower than that seen at the start of the year. The UK led the slowdown as the twin investor fears of Brexit and retail sector woes dragged on investment activity.

The wider slowdown across Europe was visible in a 15% drop in deal volume to €114 billion between January and June, Real Capital Analytics’ Europe Capital Trends Q2 report shows.

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

“The political process surrounding Brexit is clearly unsettling property investors in the UK market, who are becoming increasingly risk averse. But we also saw transaction volumes slow in most major European markets in the first-half of 2019, with the notable exceptions of Spain and Sweden. That slowdown was magnified by the sharp declines in retail investments, but excluded defensive segments such as apartments, hotels, senior housing and care homes. These ‘Beds’ sectors are benefitting from structural market factors, and are now attracting around a third of all the investment capital being placed in European property.”

European retail real estate transaction volume dived by 51% to total €12.6 billion in the first six months of this year. The retreat in this property sector, which has been most marked in the UK, due predominately to the challenge presented by e-commerce and the extended Brexit process now appears to be echoing across Europe. Retail looks set to end the year with the worst performance since the depths of the Global Financial Crisis in 2009.

Investors appear to be switching out of retail property into the more defensive ‘Beds’ sectors – apartments, hotels, senior housing and care homes. Apartments overtook retail as the second largest real estate investment sector, after offices, in the second-half of 2018 and have clearly consolidated that lead in the first half of 2019, with European transaction volume up 6% to €23.5 billion over the same period of last year.

The European office investment market had the slowest start in five years in the first half of 2019, with €47.6 billion in transactions completed, a 9% decline over the same six months of 2018. RCA’s hedonic data for Europe’s major office markets show the extended period of yield-driven capital growth turning a corner and starting to turn upwards from historic lows.

Office yields in London have risen 50 basis points since the middle of 2015. Deal activity in industrial/logistics properties, which has been one of the most ‘in-vogue’ investment sectors in Europe, boosted partly by burgeoning e-commerce volumes, was down in nine of the Top 10 markets year-on-year, although Eurozone yields are still compressing on average. In the UK, transactions dropped 40% in the first-half and yields have started to tick up from their all-time lows, while yields for Eurozone industrial stock have continued to move in.

Real Capital Analytics’ H1 European investment trends analysis continues tomorrow.

james.wallace@realassetmedia.com