COMMENT: It is now more than three months since most of Europe went into lockdown, and it is safe to say that the European commercial real estate investment market has faced a tumultuous period. Not since the global financial crisis in 2008 has the economy been knocked to this degree.
After the strongest Q1 on record, supported by a plethora of deals initiated in the final months of 2019, Covid-19 stymied investors’ interest almost overnight. What’s more, the sharp increase in risk premium and consequent pausing of debt markets halted the flow of liquidity for many remaining market players, and the imposition of material uncertainty clauses in the UK, causing retail funds to halt redemptions, created further uncertainty.
In April, CBRE’s forecasting model predicted a 72% drop in European investment for Q2 2020 relative to the previous three years’ average. This figure has proven to be in line with current market activity. Our research points to a two-thirds decline in aggregate volume compared with the same period last year, with that of May seemingly lower than April’s.
Despite the preliminary nature of these figures, which are likely to be revised upwards once additional deal information is available, they offer a good indication of Covid-19’s impact on Q2 investment volumes. But it’s likely that the full impact won’t be seen until Q3.
On the road again
As European travel restrictions and lockdowns begin to lift, investors will look to start travelling again, ultimately resulting in more deal activity.
It is therefore quite likely that investment activity in Europe could have seen its low point in May or June and pick up again in Q3. Even with the limited travel in recent months, we have seen deals involving foreign capital close during May and June, and there is certainly pent-up demand from investors looking to execute their investment strategies.
In general, we are not seeing a high degree of distress in the market, but summer could provide more guidance as open-ended funds, which have seen an increased call for redemptions, may trigger sales.
Interesting to mention is that Austria, one of the first economies to unlock in Europe, has seen investment activity rising by around 10% versus the same period in 2019. Whether this is a one-off or a trend remains to be seen, but it could be a promising indicator for the rest of Europe.
Multifamily becomes a must
In terms of sector splits, multifamily has taken over the number one position from offices. Consolidating a trend we have seen for a number of years now, multifamily is now the largest asset class in the European real estate investment market, confirming the noise coming out of the listed sector and proving that investors increasingly see it as one of the safer bets. CBRE has closed nearly €900m (£810m) of multifamily transactions since the start of Covid-19.
The logistics market is also in a strong position to recover as European countries look to shore up domestic supply chains. The main constraint for logistics remains the lack of land permissions for new development, which is curtailing volumes.
From a geographical point of view, it seems that investors are focused on the core markets, meaning that some smaller and harder-hit economies saw limited deal flow in April and May as investors focused on gateway cities.
However, as restrictions continue to ease, travel to certain countries becomes possible once again, and shops and leisure facilities begin to open their doors once again, we hope to see an increase in transaction volumes and to find the “new normal”.
Chris Brett is head of EMEA capital markets at CBRE
