According to Savills, European residential and commercial real estate investment volumes are set to reach €241bn by year-end, 18% down on last year’s total, but just 2% below the 10-year average. In H1 2019, investment volume reached a total of €111bn in Europe, 16% down on last year’s total, and 2% below the long-term average for the first half. Annualised investment fell 3% from €282bn for the year to Q1 2019 to €274bn in Q2 2019. In two thirds of the countries surveyed in the latest Savills European Investment research, investment volumes were below their respective levels for H1 2018, whilst investment levels were higher in Greece (+120%), Czech Republic (+59%), Italy (+44%) Ireland (+34%), Sweden (+42%), Norway (8%) and France (3%).
Offices as a top investment pick, retail yields softening and logistics undergoing compression
In H1 this year, offices accounted for 41% of the total investment volume. Average European CBD prime office yields in Q2 reached 3.7%, non-CBD prime office yields stand for 4.9% and average secondary office yields were 4.9%. Given the tight supply situation in many CBD markets, Savills predicts that prime offices in European capital cities of countries such as the Czech Republic, Belgium, France, Greece, Luxembourg, Romania and Sweden will still be a top pick for investors over the coming twelve months supported by resilient investor interest, with yields to move in by more than 5bsp.
Average retail yields for Q2 2019 were 4.6% for prime shopping centres and 3.4% for prime high street. Some softening of yields in this sector is forecast in the Czech Republic as well as Belgium, Ireland, Norway, Portugal, Spain and UK markets. Except from Athens, Warsaw, Lisbon and Bucharest, where shopping centre yields moved in by 25bps yoy, all other markets kept stable or softened yields.
There has been a compression of -47yoy with European prime logistics yields that counted for an average of 5.1% in the second quarter. Looking forward over the next 12 months Savills predicts that further industrial yield compression is expected across the Czech Republic, France, Germany, Greece, Poland, Portugal, Romania, Spain and Sweden. In all other markets, industrial yields are forecast to remain stable.
Core, Core+ and Value-add investment opportunities
Core+ investors should turn their attention to industrial space in the major German logistics regions, such as Hamburg and Rhine-Main, where Savills expects rents to increase 5% over the next 12 months. With record occupancy numbers in Portugal’s touristic cities such as Lisbon and Porto, core investors should look to the rebranding of existing hotel units, which is successfully driving up the price per room. Prime residential properties offer great opportunities for core investors seeking secured long-term income stream in Sweden and in the top four Dutch cities.
Specific examples of core investment opportunities in the Czech Republic include prime offices in Prague, notably newly built and modern office schemes near metro stations. Strong office demand is backed by a very low unemployment rate (2.2% in 2018, the lowest of all EU countries), which is forecast to remain low in the next five years. The decreasing level of supply adds upward pressure on prime office rents.
Savills is suggesting investors look for value-add opportunities in European cities such as Stockholm, Paris, Luxembourg and Lisbon where the solid fundamentals support strong demand for office development or refurbishment, in both prime and non-prime locations. Also, some retail assets should be considered by value-add investors, as long as the scheme is dominant in its region. In European cities such as those in the Czech Republic, Denmark, Netherlands and Poland where the e-commerce penetration rate is high and/or online sales are growing fast, good logistics schemes are becoming scarce, which will continue to put upward pressure on rents – another interesting opportunity for investors seeking added value.
Czech value-add investment opportunities include industrial assets in regional cities, notably in strong regional and manufacturing hubs such as central Bohemia, Hradec Králové, Karlovy Vary, Liberec and Pardubice regions where demand is strong, existing suitable supply is low and land availability is scarce.
Vojtěch Wolf, investment analyst at Savills, says: “We are seeing a preference for more alternative assets in terms of prime opportunities due to traditional property sectors becoming increasingly rare and continuous competitive prices. We are now in a situation where residential property is the second most popular asset class for real estate investment. This is a knock-on effect from an increase in demand for housing caused by Europe’s demographic trends and flourishing urban centres. The current circumstances in the Czech Republic present a perfect opportunity for residential and commercial investment.”