What do the leading agents say?
Direct real estate market
The improving market from end 2013 has given investors confidence for a good start in H1 2014.
CBRE reported total commercial real estate investment in Europe reached €37.9 billion in Q1 2014 – a 18% increase on Q1 2013. The fastest year-on-year growth in Q1 2014 was seen in Austria (+183%), Ireland (+179%), Spain (+132%) and Finland (+103%). The core markets of Sweden (+68%), Germany (+47%) and France (+37%) also showed significant growth compared to Q1 2013. (CBRE research more details here)
While Spain or Ireland are favoured by overseas investors looking for value-add opportunities, UK, Sweden or Germany are considered for their core investment opportunities. However, the German market has seen considerably more activity with UK and US investors now starting to look at larger non-core portfolios with assets in secondary locations.
London recorded its highest-ever quarterly investment total in Q4 2013, exceeding peak levels of 2007, as a result Q1 2014 as been quiet for London due to lack of available investments.Therefore UK investors have started looking outside the London market into regional UK centres as well as into diversifying asset class from office to logistics, business parks and more alternative sectors such as healthcare and hotels. There are perhaps five or six major regional UK cities being targeted by investors, with Manchester and Edinburgh leading the pack. (CBRE UK)
CBRE reports investment into Europe:
Yields and return
Prime yields have tightened across most of European markets with yield compression spreading to secondary assets in stronger markets, notably the UK where the debt market has improved significantly, followed by Germany. Core markets such as Central London are forecast to generate total returns in the 6-8% range, as currently low prime yields give little scope for yield compression as well as producing a relatively low income return. Prime office yields in London’s West End are now as low as 3.5%-4.0% and City offices 4.5%. (Colliers Research)
CBRE expects cities located in CEE and Eurozone peripheral countries, such as Dublin, Madrid, Moscow, Barcelona and Budapest to be the top performing cities in terms of total return, with an annual average return ranging from 12% to 15% over the 5-year to mid-2019.
IPD UK monthly index shows 3.9% total return over the first three month Jan – March 2014 compared to -1.5% for Equities and 2.5% for bonds. The prime performer was real estate securities with 6.3%. The performance of direct real estate shows that most of the return can be attributed to capital growth driven by yield compression with rental growth filtering through much slower. (IPD Research)
EMEA rental markets
The JLL office-clock shows rental growth slowing down for German cities, but London rents still accelerating over the next 12months. Most other European cities including Milan, Brussels, Paris, Madrid are now at the end of the bottom cycle and rental growth is expected to accelerate later this year assuming the overall Economic climate in Europe keeps improving, with Paris already leading the pack with +3.5%. This is also reflected in Paris increased office demand which was up 19% in Q1 2014. (JLL Research)
Real Estate Securities
Listed real estate markets were the top performer Q1 2014 with EPRA NAREIT Dev’d Europe delivering a 5.8% return.