The UK’s impending departure from the European Union has not deterred property investors so far from stashing their cash in the capital.
In fact, in 2018, investment in London property hit €30.6bn (£26.8bn), which is 21% above its 10-year average of €25.3bn, according to data from CBRE. Investment levels rose 13% compared with 2017.
Its closest European rival, Paris, saw investment volumes reach €23.5bn, which is 46% above its 10-year average, and up 14% on the previous year.
Spain’s growing economy is also drawing attention from investors, pushing total investment volumes in Madrid in 2018 to €6.5bn, up 69% on 2017 and 86% above the 10-year average.
“People like the growth story in Spain,” says John O’Driscoll, European head of transactions at AXA Investment Managers – Real Assets. “There’s no doubt that the direction of travel from an investment perspective is positive, and more investors will be looking at the market.”
Overall, European commercial real estate investment volumes reached a record high of €312bn in 2018, a 0.3% increase on 2017, meaning that London made up roughly 10% of the total market last year.
However, investment volumes fell 24% in Milan, as investors remained cautious of Italy, which technically fell into recession at the end of 2018. The Italian government’s desire to increase its spending has led to friction with the European Commission. Italy already has a huge debt burden, reportedly equivalent to 131.8% of the country’s GDP in 2017.
Investment volumes were also down in 2018 in Berlin and Amsterdam, although still tracking above the 10-year average, which Mark Gifford, head of transactions for EMEA at UBS, attributes to a “lack of standing stock”, rather than a lack of demand from investors.
Office party
The majority of the investment into these European cities during 2018 was focused on the office sector. CBRE recorded investment volumes of more than €21bn in London, with the exchange of trophy assets – such as Goldman Sachs’ new Midtown headquarters being sold to South Korea’s National Pension Service and the acquisition of UBS’s City headquarters at 5 Broadgate by Hong Kong’s CK Asset Holdings – boosting the figures.
Paris recorded €19.7bn of office deals, while Madrid saw a 164% increase in office investment to €3.5bn, up from €1.3bn.
Gifford believes that Paris’s €38bn metro expansion ahead of it hosting the 2024 Olympics, albeit now delayed, has served as a key attraction for investors.
Meanwhile, the cheap pound was a key factor in driving investment into London, as foreign buyers took advantage of exchange rates.
These overseas investors appeared less concerned with the “fog” around Brexit, suggests Gifford, as they have a tendency to take a longer-term view.
Amsterdam saw a 48% fall in investment volumes in office real estate, partly due to 2017 being boosted by a handful of high-value deals, which included Icon Real Estate selling the Atrium office complex to French property investor Amundi for a reported €500m.
Office take-up was solid in Amsterdam, London and Milan in 2018, but CBRE is predicting that Berlin, Madrid and Milan will be hot spots for rental growth this year, forecasting 6%, 6.3% and 4.2% respectively, while London is expected to see just 1.5% rental growth in the City and zero growth in the West End.
Gifford sees potential office rental growth in Amsterdam, Berlin and Brussels, and to a lesser extent Paris, over the year ahead.
E-commerce effect
Industrial and logistics investment volumes rose in 2018 as e-commerce gained more traction in Europe.
In the UK, online retailing during the December Christmas rush made up 20% of total retail sales, an overall growth of 13.9% when compared with the same month a year earlier, according to the Office for National Statistics.
Amsterdam saw a 367% rise in industrial investment volumes on 2017 last year, while Spain managed to rack up a 247% increase.
And it is a trend that Rémy Vertupier, fund manager for AEW’s European logistics fund, sees continuing.
He adds that the growth in investment volumes in Madrid was most likely due to the motorway linking Spain’s capital with Barcelona.
For Amsterdam, the abundant availability of land has spurred a lot of development, Vertupier suggests.
For David Ebbrell, M7’s director and chief investment officer, the “fight for space at the occupational level” is pushing up rental levels and anticipated rental levels, which is in turn driving investment activity and interest across the key cities.
He says demand is increasing as the growing e-commerce sector goes up against other traditional industrial site users such as food producers and light manufacturing and engineering.
And the rest
Retail investment volumes across Europe were surpassed for the first time by the residential sector, which CBRE reports saw record investment volumes of €50bn in 2018, up 22.4% on 2017 and cementing its position as the second-largest asset class.
This was helped by the wealth of interest in build-to-rent in London, which helped push investment volumes up by 81% on 2017.
Hotels and other alternative sectors also achieved record investment volumes of €22bn and €21bn respectively last year, with the growth in alternatives primarily driven by the healthcare sector.
Across the key cities, all alternative property investment volumes trended above the 10-year averages, despite some marked falls year-on-year.
“The growth of other asset types and the broadening of the investment market is something that is happening and we are prepared for as we built our platform to tackle those opportunities,” O’Driscoll says.
“Data centres are an area of the market that has a lot of growth as the big cloud providers grow and more businesses become cloud enabled.
“Last year, we bought a company called Data4, which is a developer, owner and operator of European-based data centres across Paris, Milan, Madrid and Luxembourg. We also managed to grow our residential portfolio last year, and you would expect more opportunity to arise as the build-to-rent market expands.”
Jos Tromp, CBRE’s head of research in Europe, comments: “Despite being a small but fast growing segment, the alternatives market is still really dependent on a smaller number of larger-ticket items.”
Examples include the French asset manager Primonial’s €1.64bn acquisition of half of the German healthcare real estate portfolio, owned by Medical Properties Trust, last year.
These big-ticket deals helped push investment volumes into the real estate sector in 2018 to a historical high as several investors upped their proportion of real estate investment from traditional levels of 5-6% up to 10%.
Looking ahead, Tromp predicts investment volumes being slightly softer this year across Europe, although he expects prices at the top end to remain mostly stable with yields unlikely to go down much further.
He adds that he thinks there is now a window of opportunity for more investment into European property over the next 12-18 months, including the sale of unwanted value-add or development stock, as political instability intensifies.
As O’Driscoll concludes: “Every year, people weigh up this equation of where we are in the cycle and whether it is getting late. I think, from the political side of things, that no one has the monopoly on challenges. They are an extra variable you have to factor in to your investment decisions.”
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