European investment – still life in the market, just

Commercial property investment markets proved quite resilient in the second quarter, with volumes totalling €29.2bn, 7.9% up on Q1.

Year on year volumes also rose marginally, by 0.6%, to €124.6bn. However this is 19.4% down on the average of the previous 5 years and what’s more, first half volumes were 17.7% down on the latter half of 2011.

Foreign investors were the key driver of the market, increasing activity by 48.3% on Q1 and taking their market share to 48% from 35% last year.

Domestic investors by contrast have grown more cautious, cutting investment by 13.7% on an already weak first quarter.

Commenting on the figures, Michael Rhydderch, Head of Capital Markets at Cushman &Wakefield, EMEA said: “Market activity was more robust than expected in the second quarter but the shadow of the euro zone debt crisis is clearly falling across the market. Even some previously committed investors are choosing to step back to wait to see what will happen but it’s clear that we have more than just the sovereign debt crisis shaping what is happening – activity is also being hit by the disarray in much of the banking sector, not to mention uncertainty in the wider economic and employment picture.”

“However, even though sentiment is more cautious, this is not affecting prime to anything like the same extent as average or secondary markets. High net worth individuals and family offices as well as global funds and institutions are still eager to seek out the best and most secure assets. In fact demand in some areas may be rising as investors get more realistic on pricing and the stability of property and its income is favoured over the volatile equity or low yielding bond markets.” concluded Rhydderch.

Offices have been the strongest performing sector of late, in fact seeing their best Q2 volumes since 2007, with activity rising 19.8% on Q1 to €16.5bn, 57% of the total market. Industrial market activity also improved, with a 21% increase taking the sector’s market share to 8.5%. This was on the back of a weak Q1 however and volumes are still 14% down on the 5 year average.

Retail market activity meanwhile has been a victim of the increased caution being seen in the market as well as a shortage of finance for a larger lots and a focus on only the best. Retail volumes overall fell by 5.9%, giving the sector a 19.9% share for the quarter versus a recent high of over 40% (Q1 2011). Sector patterns are far from uniform market by market however, with retail up in Germany, France and Sweden for example but offices ahead in the UK, France, Russia, Denmark and Switzerland.

Looking at the regional pattern of activity, David Hutchings, Head of European Research at Cushman & Wakefield, said, “For all the headlines on the euro zone crisis hitting the indebted southern fringe, the pattern of who’s winning and who’s losing for property investment is less clear cut. For sure the peripheral markets of the south are out of favour with many – but their market share actually rose modestly in the second quarter, from 4.3% to 5.0%, thanks to a 26% increase in activity, driven by Italy and its hospitality sector in particular.

“This has also been reliant on just a few large deals which may not be repeated of course and the region is also still a long way down on recent history – with the south averaging a market share of 8.3% in the past 5 years – but it is still better than some other regions, with Central Europe and Benelux seeing their market shares fall in the past quarter.”

Overall, core markets continue to attract most investment, with the UK, France and Germany seeing 60% of all activity in the first half of the year, modestly down on the 62% seen in 2011. However, while the big three saw volumes rise 12.3% thanks to a strong increase in France, the Nordics have been the biggest winners – pushing up to an 18% market share, ahead of Germany for the first time since 2008. At the other end of the risk spectrum, Eastern Europe also saw a strong rise and took a near 7% market share, with Russia the powerhouse behind those figures.

Looking ahead, Hutchings noted, “Prospects for the rest of the year have been cut despite the positive yield gap property enjoys over bonds. However, at least some investors are finding their way through the impasse created by stock and finance shortages as well as slow decision making and this gives us some confidence that deal levels will at least be maintained.

“Europe’s current woes should prove to be a short term issue – or even an opportunity – and while a miracle cure for European problems does not exist, in our opinion the euro zone will not disintegrate – the economic, social and political costs of failure are just too high. Hence while Q3 may be quiet due both to the holiday period and the run-off from the debt crisis, we still expect a solid pick up in Q4 and deal volumes for the year overall of around €112bn, 11% down on 2011.”

“We may soon start see a steady rise in the volume of assets than the banks and others are bringing to the market, possibly led in continental Europe by Spain as its banking rescue plan works through. While not a deluge, this could at least mark the start of an upturn in supply that will gather pace in 2013.”