Investor demand for European real estate remains strong despite Q1 volumes easing

Following a strong end to 2016, European commercial property investment volumes eased to €44.2 billion in Q1 2017, an 8.3% decrease compared with the corresponding quarter of 2016. However, according to the latest research from Knight Frank, contrasting trends were observed in the continent’s largest markets.

On a year-on-year basis, Q1 investment activity was down in both France (-33.2%) and the UK (-22.1%). The slowdown in France reflected investor caution in the run-up to the presidential election, while UK investment activity continued to be influenced by uncertainty following last year’s Brexit vote. However, the overall decrease in UK volumes belied an upturn in the London office sector, driven by overseas buyers from Hong Kong, China and Germany.

The German investment market maintained the strong momentum which has seen it overtake the UK as Europe’s most active market in recent quarters. Q1 saw Germany’s investment volumes increase by 27.3% year-on-year.

A strong start to the year was also observed in Spain, with an improving economy and rental growth prospects fuelling international investor demand. Unusually, Madrid overtook Paris to be the second most active European city investment market in Q1, behind only London.

Regardless of the decrease in overall European investment volumes in Q1, investor demand for European real estate remains strong and it continues to drive yield compression. The Knight Frank Weighted Average Prime Office Yield hardened by four basis points in Q1.

Lee Elliott, Partner Head of Commercial Research, Knight Frank said: “Germany consolidated its position as Europe’s most active investment market in Q1, with transaction volumes exceeding the UK for the third successive quarter. The country’s current popularity as a safe haven market will have been bolstered by recent economic surveys, which are consistent with acceleration in German GDP growth in Q2.”

Chris Bell, Managing Director – Europe, Knight Frank said: “Although overall European investment volumes were down in Q1, market evidence suggests that this is more a result of lack of supply than investor demand, borne out by the large volumes of capital remain targeted at real estate. This point is further underscored with the strong competition for prime assets continuing to support historically low yields across most of the continent. The outlook for the rest of 2017 has been boosted by recent election results in France and the Netherlands, which have calmed investors’ fears of a lurch towards politicians with disruptive populist agendas.”