A strong Q3 performance from Paris, which edged ahead of Brexit-battered London as Europe’s largest metropolitan real estate investment market for the first time, helped total European deal volume to dip only slightly into negative territory year-on-year after the marked slowdown in the first half of 2019, Real Capital Analytics’ Europe Capital Trends Q3 2019 report shows.
Total European investment volume in the third quarter was down 5% year-on-year to €64.8 bn, compared with a 9% drop in the first half.
Tom Leahy, RCA’s Senior Director of EMEA Analytics, said: 'If the UK is excluded from the equation, then the European real estate investment market would have been in positive terrain for the third quarter and indeed year-to-date, with France a major contributing factor. The European Central Bank’s ongoing quantative easing policies are underpinning the attractiveness of real estate in the eyes of investors, particularly when many government and corporate bonds are offering negative yields.'
France was the outlier among the top European markets, with transaction volume up substantially in Q3 and 16% so far this year, to a certain extent offsetting weak performances in the U.K. and Germany. For the first time, Paris became Europe’s #1 metropolitan market based on year-to-date activity.
The French market is dominated by Paris, which typically accounts for around 70% of annual investment volume, but deals in regional cities were also ahead of where they were this time last year. Lyon was the main driver, with €1.2 bn in transactions already recorded in 2019, putting the market on course for a record 12 months. The RCA Capital Liquidity Scores show Lyon is Europe’s best performer in the last two years, chalking up a 50% rise.
Investment in Paris is up 23% on the year, while London is down 32%. Although the total value of transactions is similar for both cities, the allocation of this capital between property sectors is not. The French capital’s office market accounts for 75% of the annual investment total, whereas in London the figure is closer to 65%. Brexit uncertainty is having the greatest impact on office transactions in London, with deals in the sector now representing the lowest ever proportion of the overall investment market.
An increase in cross-border activity, particularly from South Korean investors, is largely driving the uptick in the Paris market. These investors have spread their geographic net in 2019, targeting a variety of markets across Western and Central Europe, including Warsaw and Prague.
While the U.K.’s departure from the EU has been delayed yet again, with a general election slated for 12 December the end of the Brexit saga may be in sight. Given the relative value the U.K. offers versus some other global markets, any eventual agreement will likely have a positive effect on property investment. Average office yields in Central London are above those in comparable European markets. The gap between 10-year U.K. government bond yields and those in this property sub-market are also the highest ever recorded, while liquidity is at the lowest level since 2009.
Both continental European and global capital flows into the U.K. real estate investment market have plummeted in 2019. Nevertheless, it remains Europe’s number one market overall for foreign capital, absorbing the same volume of non-European money as France and Germany combined in the first nine months of 2019.