CoStar Column: European outlook looks rosé in 2018

By Chris Bell - Thursday, March 08, 2018 13:51

Chris Bell, Managing Director, Europe, Knight Frank, takes a look at how European real estate is faring as the annual conference in MIPIM looms.

I always wait to imbibe my first glass of rosé of the year at Mipim in Cannes whilst taking in the exceptional view from Knight Frank’s seafront pavilion. With the annual property event nearly upon us, I thought it would be an opportune time to take a look at how the European real estate markets have fared over the last 12 months - and what the next 12 months might have in store.

In the final quarter of 2017, European commercial property investment reached one of the highest quarterly totals on record, at €80.7bn. This took investment for the whole year to €231.8bn, an increase of 8.4 per cent on 2016.

Following a slow start to the year, investment in the UK accelerated in the last half of the year, bringing annual volumes to €59.3bn. The continued flow of capital from Greater China into the Central London office market supported this improvement. The UK regained its position as Europe’s most active market from Germany, which had edged ahead in the first half of the year. Nonetheless, the German investment volume of €50.9bn was a ten-year high, and the country was the leading destination for US capital entering Europe in 2017.

The France investment market had an extremely slow start to the year, but it recovered in Q4, when more capital was invested than in the three previous quarters combined. This was partly due to a revival in investor confidence following political uncertainty earlier in the year. The market was dominated by local investors who accounted for more than 70 per cent of transaction volumes.

Elsewhere, stand-out markets in 2017 included the Netherlands and Finland, both of which had record years, on the back of large inflows of cross-border investment. While North American and European investors were the main sources of capital in these two markets, there was also increased investment from Asian investors, who are showing growing interest in a broadening range of European markets.

The logistics and industrial sector had an outstanding 2017, with investment volumes rising 42 per cent year-on-year to a record €38.9bn, or 17% of the total commercial market. Volumes in this sector were boosted by CIC’s purchase of Logicor for over €12bn and GLP’s acquisition of Gazeley for €2.4bn. As well as demonstrating the strength of demand for logistics property, these deals are also indicative of the appetite for platform and portfolio deals from investors seeking to deploy large volumes of capital into real estate.

Despite already being at record low levels across much of Europe, further yield compression was recorded in Q4 in markets including Amsterdam, Dublin, Frankfurt and Milan. As a result, the Knight Frank European Weighted Average Prime Office Yield hardened by seven basis points to a new low of 4.20%. There is room for further yield compression in some markets in 2018, although a general stabilisation of European prime yields may be reached by the year-end.

Q4 was a stellar quarter for a number of European office occupier markets, with take-up in Dublin, Madrid, Munich and Prague increasing by well over 50 per cent year-on-year. For 2017 as a whole, aggregate take-up in the major European markets monitored by Knight Frank was up by 9 per cent compared with 2016.

On the back of strong demand and tightening availability, European rental growth gathered momentum in Q4. Markets such as Amsterdam, Berlin, Brussels, Frankfurt, Madrid and Paris all recorded increases in prime office rents, pushing the Knight Frank European Prime Office Rental Index up by 1.5 per cent during the quarter.

The European commercial property markets have entered 2018 with a strong momentum and with a weight of international capital available and looking to deploy in real estate we expect this momentum to carry on throughout the year. This, combined with the underlying supply and demand fundamentals for property driven by increasingly strong economic growth numbers suggests to us that 2018 could be a record breaking year in Europe - which should make for an interesting and busy MIPIM this year.

Chris Bell, Managing Director, Europe, Knight Frank


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