Commercial real estate investment volumes across Europe are currently on course to meet 2017 levels, after Q1 2018 was broadly in line with the long-term average, according to international real estate advisor Savills.
Following one of the strongest quarters on record in Q4 2017, commercial investment totalled €46 bn across Savills survey area in Q1 2018, down 8% compared to the same period last year but broadly in line (-3%) with historic trends, despite the traditional volatility of first quarters.
Poland (+329%), Belgium (+248%) and Luxembourg (+144%) all saw volumes increase in the first quarter, says Savills. In Poland the sale of a €1 bn retail portfolio gave Q1 volumes a boost and in Belgium a number of large deals carried over from Q4 2017 to Q1 2018. The UK, Germany and France remain the dominant markets for investment, collectively accounting for 63% of activity, says Savills.
The biggest falls in activity were recorded in Romania (-81%), the Czech Republic (-77%) and the Netherlands (-53%). Savills says this can be partly attributed to the Czech Republic and the Netherlands both experiencing investment activity well above their long-term averages in 2017 and that the fall in volumes may be a sign of investors taking a breath in Q1 before resuming activity later in the year.
The amount of overseas money invested in the region also remained unchanged in Q1, says Savills, with international investors accounting for approximately 30% of all cross-border transactions, although the allocation per asset classes and geographical destinations has become more pronounced depending on the origin of investors (see table below).
Overall office yields are at historic lows due to continued strong demand, says Savills. Prime CBD office yields moved in by -22bps on average y-o-y and are now at 3.86% with the highest movements compared to Q1 2017 in Frankfurt (-70), Amsterdam (-60), Lisbon (-50), Helsinki (-50) and Berlin (-50). According to Savills, due to the lack of prime office space available in central locations, secondary CBD office yields and prime non-CBD office yields are also under strong downward pressure. On average across Europe, they moved in by 32bps to 4.93% and 37bps to 4.91% respectively. Prime retail warehouses experienced the highest yield compression of all sectors at -39bps on average.
Lydia Brissy, director in Savills research team, said: 'Prime office yields will remain stable in core countries but will continue hardening in other parts of Europe, notably CEE and southern European countries. The yield gap between asset classes and locations will continue closing but prime products will remain the main targets for investors.'
Marcus Lemli, head of Savills European investment, added: 'In spite of softer investment activity during the first quarter, at the moment we expect 2018 full-year turnover to be in line with last year's volume at approximately €242 bn. European prime real estate remains an asset class of choice due to attractive yield spreads over long-term interest rates and positive rental growth prospects, and offices will continue to be the preferred destination, although investors’ appetite for alternative assets will persist.'