RCA says the UK remains Europe’s number one market overall for foreign capital, absorbing the same volume of non-European money as France and Germany combined in the first nine months of 2019. And while the UK’s departure from the EU has been delayed yet again, the 12 December slated general election could mean the end of Brexit saga is finally in sight, says RCA.
Tom Leahy, RCA’s Senior Director of EMEA Analytics, explains:
“Given the relative value the UK offers versus some other global markets, any eventual agreement will likely have a positive effect on property investment. Average office yields in Central London are above those in comparable European markets. The gap between 10-year UK government bond yields and those in this property sub-market are also the highest ever recorded, while liquidity is at the lowest level since 2009.”
Capital Economics, as ever, offers a nuanced view. Andrew Wishart, UK Economist at Capital Economics writes:
“If the Conservatives do win a majority, it could be the moment we move from a ‘repeated delay’ Brexit scenario, in which demand continues to be hamstrung by Brexit uncertainty, to our deal scenario, in which we think GDP growth would pick up… That said, Johnson’s deal could prove to be a mirage in the Brexit desert. In the new deal the future relationship is an open question, so the UK could end up trading with the EU on WTO terms come 31st December 2020 when the transition period ends.
“As a result, there is a possibility the deal does little to revive animal spirits. On the other hand, if the government accepts it will take time to get a trade deal, extends the transition to December 2022, and pushes Brexit down the agenda, improved sentiment should shift the economy onto our stronger deal scenario forecast. As we’ve already hinted, the election might not play out as expected… In any case, the further delay to Brexit will mean uncertainty remains high for the time being.”
To read Capital Economics’ latest Brexit note in full, please click here.
As the UK struggles, Germany has cemented its position as Europe’s largest market, albeit a markedly slowing one. Transaction volume in Germany between January and September 2019 dropped by €6.0 billion compared with last year, according to RCA data, adding that most of this fall can be attributed to Frankfurt. Just €3.8 billion has been transacted in the city so far this year, pushing it down to seventh in the ranking of Europe’s largest metropolitan markets. By contrast, deal volume in Berlin is up 40% year-on-year, with the city ranked as the most liquid market in Europe in RCA’s mid-2019 Capital Liquidity Scores.
Tom Leahy added:
“Berlin is also an important component of Germany’s apartment market, Europe’s largest residential investment sector. Berlin apartment transactions jumped 29% year-on-year in the first nine months of 2019, but activity slowed significantly in the third quarter after the imposition of rent controls. RCA’s Hedonic Series of data show residential pricing in the German capital may now have peaked.
“It remains to be seen whether the developments in Berlin will impact on the broader German apartments sector and the European residential market as a whole, where investment volume is at a record level, having climbed 7.0% in the first nine months of this year compared with the same period of 2018.
“The Madrid apartment sector, for example, was the fifth-largest property investment sector in Europe in the first nine months of 2019, as US private equity firms continued to hoover up residential asset portfolios that were foreclosed on by lenders in the aftermath of the financial crisis.
“Investment in apartments overtook retail in the second half of 2018 as the second-largest real estate investment sector in Europe after offices, and the apartment segment has continued to extend its lead since. The retail sector malaise that started in the US and the UK has spread through a number of continental European markets, with overall volume down 32% versus this point a year ago. The retail deal downturn is having a clear impact on pricing, with average transaction yields for European retail properties now at a five-year high.”