European commercial property investment came to €43.3 billion in Q2 2017. Transaction volumes for the first half of the year amounted to €90.3 billion, representing an 8% decrease year-on-year.
Although overall European investment volumes were down year-on-year in Q2, sentiment remained buoyant in many key markets. Germany has become the leading European investment destination for North American investors and the dominant location for intra-European cross-border investment.
The investment markets of Spain and the Netherlands were also buoyant throughout H1, with investors attracted by strengthening rental growth prospects. Conversely, investment volumes in the UK remained well below the levels seen prior to last year’s Brexit vote, despite an increased volume of Asian capital flowing into the London market.
During H2, European investment volumes should also receive a boost from the completion of China Investment Corporation’s €12.25 billion acquisition of Blackstone’s pan-European logistics company, Logicor. The deal agreed in Q2 and, on its expected closure later this year, will be the largest-ever European real estate deal.
European prime yield compression showed no signs of abating in Q2, with prime office yields hardening in markets including Amsterdam, Brussels, Milan and Vienna. Prime yields also continued to fall in the major German office markets, and are now over 100 basis points below previous record cyclical lows in Berlin, Frankfurt, Hamburg and Munich. The Knight Frank European Weighted Average Prime Office Yield hardened by nine basis points over the quarter to a new low of 4.35%.
Aggregate office take-up in the European markets monitored by Knight Frank was up by 4% in the first half of the year, driven largely by the continued strength of the major German markets, as well as increased activity in Spain following a relatively subdued 2016.
Office rental growth gained traction in the tightening Amsterdam and Madrid markets during Q2, while moderate increases in prime rents recorded in Frankfurt, Milan, Paris and Stockholm. In contrast, prime rents declined in the West End of London, where they are now down by 13% year-on-year.
Overall, the Knight Frank European Prime Office Rental Index climbed by 0.7% during Q2, to reach a nine-year high. The diminishing availability of prime CBD office space should drive further rental growth, particularly in key markets in Germany, the Netherlands, Spain and Sweden.
Matthew Colbourne, International Research Associate, Knight Frank commented: “Although overall European investment volumes were down in Q2 compared with the same quarter of last year, activity has remained buoyant in a number of major markets. Germany has now established as the preferred location for investors seeking a safe haven European market, while strengthening rental growth prospects have buoyed transactional activity in the Netherlands and Spain. With a number of very large transactions due to be completed in the second half of the year, we expect European investment volumes to pick up in H2.”