Brexit risk aversion drives down UK deals by 31%

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 bn, according to new data from Real Capital Analytics (RCA).

The wider slowdown across Europe was visible in a 15% drop in deal volume to €114 bn between January and June, RCA added.

Tom Leahy, RCA’s senior director of EMEA Analytics, said: '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.'

According to Leahy, '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'.

Europe sluggish
European retail real estate transaction volume plummeted 51% to total €12.6 bn in the first six months of the year, with the retreat from the sector - which started in the UK - now spreading to the rest of Europe, according to RCA.

Retail looks set to end the year with the worst performance since the depths of the global financial crisis in 2009, the report said.

Apartments overtook retail as the second largest real estate investment sector, after offices, in the second-half of 2018 and have consolidated that lead in the first half of 2019, with European transaction volume up 6% to €23.5 bn 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 bn 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.

Asian funds vanishing
German institutions continued to top the rankings of investors in European real estate in H1 and on a rolling 12-month basis their investments are at record levels. However, Chinese and Hong Kong-based investors have vanished from the top-ten list, RCA said.

Between 2013 and the end of 2017, these investors spent over €50 bn on European commercial property, but domestic capital restrictions mean buying has virtually ground to a halt. For the first time, they have become net sellers in European markets.

Chinese and Hong Kong investors sold €3.2 bn in European assets in the first-half of 2019 versus acquisitions of just €1.0 bn.

Paris closing gap on London
In the UK, April to June was the slowest quarter for property investment since 2012, and both cross-border and domestic investment levels are at a six-year low.

France fared relatively better than the other large European real estate investment markets in H1, although transaction volumes were down 11% year-on-year. The Paris office market was buoyed by an influx of capital from South Korea, with more than €2 bn of deals in the first-half involving a South Korean purchaser.

The gap between Paris and London – the number two and number one most active metropolitan real estate investment market in Europe – continued to narrow markedly in the first six months of 2019.

The French capital lagged its UK counterpart by about €1.2 bn in transactions. Investment volume fell by 34% year-on-year in London to €11.3 bn, while Paris was down a modest 6% at €10.1 bn.

Germany retained the top slot as the most active European national investment market in H1, slightly ahead of the UK, but deal volume fell by 21% due primarily to declining office transactions.

In the apartment sector, by contrast, German institutions acquired more properties through to June 2019 than they did for all of 2018.

Spain and Sweden both stand out among the group of the largest European investment markets as recording increased investment volumes in the first-half.

 

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