Covid-19 crisis will hit hardest in European markets most dependent on foreign capital

Real estate investment volume in Europe during the first quarter totalled €64.2 bn, up 7% compared with the year-earlier period, but the sharp slowdown in deal flows in March after the onset of the Covid-19 pandemic, and the uptick in withdrawn transactions, signal markets are likely heading into further hefty pullbacks in activity, Real Capital Analytics’ European Capital Trends report for Q1 2020 shows.

RCA concludes that those markets most dependent on non-domestic sources of capital, broadly those in Southern and Central and Eastern Europe, potentially face the biggest declines in investment. For example, Warsaw has recorded a sharp uplift in deal volumes in the last two years, but almost all of this is from overseas investors, making it more vulnerable than other cities such as Stockholm, Frankfurt or Paris, where a large and sophisticated domestic investor base exists.

Retail is the property sector that will likely be most negatively affected by the crisis over the long term and RCA foresees the growth in investment volumes reversing in the second quarter, while capital values will continue to fall in the least favored sectors. Another part of the market that looks to be under strain from the crisis is coworking offices. By contrast, the industrial segment is much better placed to weather the current storm after turning in the best ever first quarter for warehouse investment across Europe. An RCA price indicator shows a 9% increase in capital values for Western European logistics warehouses in the last 12 months.

Seven of the top 10 country markets in Europe by investment volume registered first-quarter activity above last year’s level, clearly illustrating the transaction market’s delayed reaction to the rapid onset of the current crisis.
 
Germany retained the title of Europe’s largest market and investment rose 9% year-on-year, largely due to the completion of Aroundtown’s acquisition of fellow listed player TLG for €4.7 bn, continuing the trend for consolidation among Germany’s largest listed property owners.
 
Some of the smaller markets in Europe registered very strong growth with Poland, Belgium, Czech Republic and Denmark seeing investment volume more than double. Belgium recorded its country’s largest ever property deal after the Finance Tower in central Brussels sold for €1.2 billion to a consortium of South Korean investors and a U.K.-based asset manager.

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