This is an overview of the real estate market across Europe with deeper insights into the following fourteen regions: Germany, United Kingdom, Nordic Region, Netherlands, Belgium, Luxembourg, France, Switzerland, Austria, Italy, Spain, CEE, Russia and Turkey. Momentum continues to build across these markets, with investment property transaction volumes delivering a 10% year-over-year (YOY) growth to reach US$118.7 billion in the first half of 2014. This follows the strong growth (17%YOY) seen in 2013. Through our day-to-day conversations with our clients, it is apparent that investor confidence remains high and that many are facing significant competition in a bid to secure investment opportunities, both core and opportunistic.
Focusing on the sectors, office space again secured the greatest share of investment volume, attracting around 41% of total European real estate investment in first half 2014, having secured the same percentage throughout 2013. Retail secured an additional 2% share of investment volumes, increasing to 25% in first half of 2014. In contrast, residential experienced some softening, declining slightly from 16% of 2013’s market volume to 12% in H1 2014. Turning to our special focus sector for this issue, hospitality transaction volumes secured 8% of total investments made in the first half of the year.
YOY growth for the first half of 2014 showed strong increases in retail and office investment volumes (51% and 14% respectively). The high growth in the retail segment results from a relatively high number of major shopping center deals, such as Bluewater in the UK, Beaugrenelle in France or CentrO in Germany. In contrast, a decrease in transaction volume was noted in industrial (-2%) and residential property (-26%).
As already highlighted in the last edition of Real SnapShot, cross-border capital is a key driver of transaction volumes and these investors have increased their share of total investment in almost all markets. Cross-border capital continues to invest primarily in the highly liquid European cities such as London and Paris. However, we are seeing increasing appetite for the peripheral markets from many jurisdictions and investment activity in these markets has seen significant volumes of opportunistic capital, led by US capital. US investors represent 75% of the global capital invested into the peripheral markets with investors such as PIMCO, Colony Capital and Blackstone being just a few of those hitting the medial headlines as they secure and build sizeable European real estate portfolios.
The United Kingdom continues to attract the greatest investment volumes, securing US$37.4 billion across all sectors in the first half 2014. This accounts for almost one third of the total European real estate investments in the same period and represents an expansion of the UK investment volume of 19% on a YOY basis. Investment activity still concentrates on the greater London area, which combines a share of 50% of total investments, across all sectors, made in the country.
The German property investment market attracted the second largest share of real estate investments made in Europe in the first half of 2014. The transaction volume of US$25.3 billion reflects a slight decrease of 2% YOY. France noted a significant 39% YOY increase in investment activity, securing$17.3 billion. This marks a rebound for the French property investment market having recorded a fall of 7% in 2013. Paris continues to dominate capital flows, securing 70% of the total transactions made in French investment property in H1 2014.
In our last issue of KPMG Real SnapShot, we highlighted that the real growth drivers in the European real estate investment market were the peripheral markets such as Italy, Spain or Ireland. Spain again recorded a significant influx of foreign capital that delivered an increase of 124% in transaction volume in the first half of the year. Ireland also saw an uplift with transaction volumes increasing by 39% YOY. In Italy however, transaction activity has been negative compared to the previous year. These opposing trends can be explained by the differing economic growth prospects for the countries, which is key to investor sentiment.
Looking ahead, we expect that investment activity in secondary cities and in the peripheral markets will continue to gain traction due to highly competitive pricing in the sought after economic centers. However, such activity will correlate with the economic recovery and be tempered by the political stability of the individual geographical areas. We also expect the core markets to largely retain their market share of investment volumes as the major capital sources continue to seek access to these liquid investment markets.
As long as re-financing rates remain low, real estate will continue to attract capital allocations due to the segment’s comparably favorable risk/return profile, even if the perceived pricing temperature seems quite elevated in some markets.
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