Property investment market remains strong in Europe in H2/2017

Commentary on the European property investment market H1 2017

Strong property investment activity suggests good performance in Europe towards the end of the year, as the volume of pending transactions was record high after the second quarter. As opposed to lack of demand, lack of supply is preventing the emergence of more transactions. Cross border investors prefer large-scale transactions, where the supply is scarce. Quarterly volatility in the Nordics can be high as the number of mega deals is limited compared to major markets, such as London and Paris. Most active of overseas countries investing in Europe is US, investing strongly in the Nordics as well.
 
The volume of pending deals at a record level 
 
Majority of European markets will see a greater investment surge in the second half of 2017. A record amount of pending deals and a strong start for the 3rd quarter suggest investment volumes to reach at least last year’s total or even to surpass the transaction volume of 2016 in several countries. 
 
In the RCA (Real Capital Analytics) database the volume of pending deals was €38bn at the end of Q2 2017 in Europe, while a year ago at the same time the volume was €25bn. The number of pending deals was 1215, while the respective number last year was 619. In the Nordic countries, pending deals amounted to just over €5bn according to RCA. This is a fairly low amount, since the volume of pending transactions in Finland alone, including acquisitions of Sponda and Logicor (the Finnish share), is several billions. 
 
Supply-driven market 
 
Demand for good quality properties remains strong. The investment activity does not seem to slow down, even though the boom has been going on for several years, and heavy competition for prime properties has driven yields historically low.
 
The main reason for fall in investment volumes in the mature market is lack of desired supply, as opposed to lack of demand. Therefore, quarterly and YOY comparison of investment volumes by countries is not so relevant. In such minor property markets as Finland is, the quarterly and even the annual volatility can be high, depending on the volume and number of major transactions in each quarter. As an example Austria nearly surpassed the 2016 full-year investment by midyear 2017 thanks to the IZD Tower mega deal, the third-largest deal ever in Vienna. Large-scale transactions attract especially cross border investors. Many international investors focus on the big cities, where lot sizes are larger. As a result of tough competition core office properties will be paid double prices compared to secondary office properties. (Source: Savills, RCA, Realia Group)
 
International investment strengthens - US buyers most active in Europe
 
According to Savills, cross border investments in Europe increased from €42bn in H1 2016 to €50.1bn in H1 2017. Germany was number one destination for cross border investment in H1 2017. Berlin, as top spot, attracted more than €5bn overseas capital, and many other major German cities doubled the volume of cross border investments YOY. (Source: RCA, Savills, European Investment, August 2017)
 
US investors remained most active of overseas originated investments in Europe. They are widely present in European property markets, also in the Nordic countries. For example recently very active Blackstone’s long-standing strategy is to invest in high-quality assets and businesses in the Nordic region. Excluding the intra Nordic investments, international flows of capital are mainly coming from the UK, the US and Germany. (Source: Savills, Nordics Investment, August 2017)
 
Polar Bidco, owned by Blackstone U.S. Group, has bid €3.8bn ($4.2bn) for Finnish listed property company Sponda. The price includes €2bn in debt to be assumed by Polar Bidco and €1.8bn in equity. The company owns 1.2m sqm of office and retail properties in major Finnish cities - among others Sponda has significant holdings in Helsinki CBD. The acquisition will be confirmed in H2 2017. Further, at selling side, Blackstone has confirmed the €12.25bn sale of its European logistics arm Logicor to China Investment Corporation. The transaction will be included in H2 2017 volume. Logicor owns in Finland the largest industrial and logistics portfolio of 78 assets with a leasable area of approx. 1.1m sqm. (Sources: Sponda press release; Logicor)
 
Nordics, safe haven for core investors
 
Solid property market fundamentals, strong economies, politically stable environment, easy to do business, an effective rule of law, and high quality infrastructure are some of the benefits the Nordic region offers to foreign property investors. Besides, the Nordics population is highly urbanized compared to other European countries, and population growth of all four metropolitan areas is brisk.
 
In the Nordics, the total investment volume in H1 2017 reached €19bn*, of which cross border investments accounted for €5.5bn. The total decreased 4%, while cross border investments increased 23% from H1 2016. The trend is up towards the end of 2017 and the full-year 2017 total is expected to reach the transaction volume of 2016 or even to surpass it. Quarterly volatility is high as the number of mega deals is limited compared to major core markets in Europe. An example of this is a mega deal of Statoil HQ for €414m in Q2 supporting the total Norwegian investments almost to double the volume in the first half of 2017 on H1 2016. All in all, strong investment activity in the Nordics continues. Lack of supply, however, is preventing the emergence of more transactions. *includes residential portfolios 
(Source: Savills, Nordics Investment, August 2017)
 
In Finland H1 2017, investments totaled €2.52bn, 32% less than a year ago in the same period. If residential portfolios are excluded, the transaction volume remained at the same level as a year ago. Investments in residential portfolios in the first half of 2016 reached record high €1.4bn, while the comparable volume this year remained approx. at €0.4bn. Foreign investors interest in the Finnish property market increases supported by stronger economic growth than expected. Cross border investments increased by 48% in H1 2017 YOY. 
 
Sources:
Real Capital Analytics (RCA): Europe Capital Trends Q2’17
KTI, Transactions Information Service