Europe investment overview Q1 2016

Europe performed strongly last year. Early indicators suggest that commercial property transaction volumes in 2015 rose by more than 20% year-on-year to around €230bn ($251bn), according to Knight Frank’s European Commercial Property Outlook 2016 report, driven by a stabilising eurozone economy and low borrowing costs.

This offers cause for optimism in 2016 as the region continues to capture the lion’s share of global investment flows. While it is no longer the fastest-growing continent, a title now held by North America, the outlook for Europe remains positive when it comes to investment activity levels, despite uncertainty around where performance will come from and how risk will be priced.

This has forced investors to work out which is the right strategy in today’s market. David Hutchings, partner and head of EMEA investment strategy at Cushman & Wakefield, says: “It comes down to what risks investors are prepared to take and on what timescale.”

Large volumes of capital are expected to continue to be drawn to the property sector as 2016 gets under way, predicts Knight Frank, but caution is advised.

The three-year run of annual increases in overall transaction volumes of more than 20% looks unlikely to continue as momentum wanes at the hands of prospective global interest rate rises, pricing concerns and a possible deceleration of capital flows into Europe from Asia and the Middle East.

Commercial hotspots

Improvements in European occupier market activity in 2016 should inspire investor confidence. The majority of key office markets saw increased take-up in 2015 and Knight Frank predicts that aggregate European office take-up will grow by around a further 10% this year.

And while office rental growth was moderate outside of major hotspots such as London and Dublin, despite improved occupier demand, diminishing availability of prime office space in European CBDs should make rental increases more pervasive.

Hutchings suggests that while the current supply pattern is more favourable to offices than retail and industrial, investors will continue to align their interests with geography and city strength rather than specific sectors.

Residential hotspots

Portugal’s improving economy has led to Lisbon undergoing an unprecedented level of redevelopment of buildings for residential use. CBRE estimates that there were 40 buildings completed in 2015, while 74 are currently under construction and an additional 64 are under study or in project. This is supported by incentives provided both to urban renovation and to foreign investors for housing purchases.

New house sales in France are up by more than 20% to 74,700 and prices are stabilising. But while construction has yet to pick up, recent polls of property developers in the region suggest that prospects of construction starts have revived, indicating the potential for recovery in 2016.

Meanwhile, Germany’s residential property market enjoys sustained attractiveness. CBRE reports that investment in residential portfolios and complexes comprising more than 50 units was around €23.3bn in 2015, up by €9.9bn (74%) year-on-year and setting a new record that is 24% higher than the performance of the last boom year, 2005.

Growth areas

Healthcare, automotive and student property are still emerging sectors in many European markets, however their yielding opportunities are higher than traditional commercial property sectors and offer investors portfolio diversification.

Central Europe has already experienced yield compression and offers greater potential for rental growth, though Hutchings says the rest of the European market is not far behind.

Risks and challenges

Recent years have seen Europe demonstrate macro trends to follow, such as the eurozone crisis. Today’s concerns for real estate markets are more localised, according to Hutchings. While economic growth is improving, it is still relatively low, and low inflation means there is no rising tide of expansion to help real estate.

Meanwhile, a potential Brexit adds uncertainty to the marketplace and activity in the UK at the start of 2016 was quieter than the continent.

Must-have contacts

Andrew Sim
Head of European capital markets, Knight Frank

David Hutchings
Partner and head of EMEA investment strategy, Cushman & Wakefield

Rupert Sebag-Montefiore
Head of global residential, Savills

Neil Blake
Head of research, UK and EMEA, CBRE

City guide: Copenhagen


Copenhagen was once considered a distressed market, but the Danish capital, which contributes around 14% of the country’s $335.9bn GDP, is now noteworthy for its investment opportunities. Development in the city’s biotech sector, the third largest in the world after the US and Singapore, has helped to propel the city to fifth place in the Urban Land Institute and PwC’s list of top investment markets in the Emerging Trends in Real Estate 2016 report, up by two spots on the previous year.

Why invest?

Copenhagen, along with the Nordics as a whole, is considered a good and fair place to do business, which, particularly following the financial crisis, is something people are paying more attention to. As a result, demand for real estate is healthy. Prime retail rents in the city have been resilient. While rents fell by more than 10% in 2009, they bounced back quickly in 2010 and have been growing since, due to strong competition for the best locations. Copenhagen is a mature and competitive market with a very strong domestic investment scene. New investment opportunities are getting harder to find, but worth it if you do.

The numbers

€5.9bn – commercial real estate investment in 2015, up by 29% year-on-year and the highest total on record

2m – metropolitan population

4.75% – average yield for CBD offices

The opportunities

There has been plenty of focus on Copenhagen’s retail market, with upmarket retail brands actively acquiring high-quality retail space in the city. As a result, it is time to look towards other sectors. The office market, both in central Copenhagen and the city’s regenerated docks, known as the Waterfront Development, are worthy of attention. While these opportunities might not be best described as outperformers, they do offer investors very good long-term and stable assets with real growth potential.

Stand-out scheme

The construction of the Ring 3 Light Rail project in Greater Copenhagen is expected to commence this year, with services opening to the public in 2020. The kr4.4bn ($673m) scheme forms part of an urban development plan, known as the Finger Plan, which the city of Copenhagen implemented in 1947. It focuses on developing the cities around the Danish capital, as well as the five fingers extending from the dense urban area (palm) of central Copenhagen. The dual-track light rail line is expected to carry 43,000 passengers a day and as many as 14m passengers a year.

Top tips

  • Smile, you are in good company. The Danes regularly place in the top three of the UN’s World Happiness Report. Cyclists rule the road. Half of the 350,000 people working in Copenhagen do the daily commute on two wheels. Keep it clean. Copenhagen was named the European Green Capital in 2014 and has plans to be the world’s first carbon-neutral capital by 2025. Glorious gastronomy. Copenhagen is home to more Michelin-starred restaurants than any other city in Scandinavia, with a total of 15.

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