Europe remains the top cross-border CRE target for investors, with London and Paris the leading city targets there
So says the 2019/2020 Winning in Growth Cities report from international real estate specialist, Cushman & Wakefield.
Overall, global commercial real estate (CRE) investment fell 0.7% in the last year, held back by listing shortages and high prices in some markets, but demand remains at record levels, with domestic and regional investors driving activity.
As a result, the biggest cities have been most in-demand, with their market share increasing in all regions.
Europe claimed five of the top 25 cities, led by London and Paris. Madrid was the fastest-growing European target, with volumes up 144%, ahead of Berlin, up 20% year-on-year, and Frankfurt, up 19%.
Europe remains the top cross-border CRE target
Europe remains the top cross-border CRE target, but all regions are tending to see increased interest. The overseas money flowing into Europe and North America is relatively evenly divided between global and regional sources.
By sector, investors have continued to spread their net more widely, with residential the strongest area of growth last year.
London and Paris are both in the top five global markets by size and among international buyers, London is again the market to beat. Brexit has not deterred most investors, who consider it a tactical issue with respect to timing and price, rather than a structural hit to its appeal.
Muted economic growth and ongoing headwinds mean the growth side of the equation is in doubt in the months ahead. With quantitative easing and negative interest rates back on the agenda, investors have a more certain environment in which to plan.
The question of what differentiates markets going forward will be less about growth and more about relative financing costs, the timing and direction of structural market shifts and, as ever, finding stock in a global market with relatively limited distress, says Cushman & Wakefield.
Sector trends have diverged in the past year, with alternatives such as residential gaining further favour globally, while retail has struggled to find its floor, with volumes down 10% thanks to falls in Europe and Australia.
Logistics are still highly favoured
Logistics remained highly favoured but stock shortages and a reduction in the number of very large portfolio trades have left volumes down. However, along with residential, logistics volumes are still well above the five-year average, underlining the structural shift in portfolio allocations that has taken place.
Offices and hotels are holding their ground, while retail now stands 15% below its five-year average, after volumes peaked globally in 2015.
Cross-border CRE investment has followed a broadly similar trend, with logistics down most notably due to the importance of foreign capital in the large portfolio trades seen in 2017/18. Development and office investments meanwhile have seen an increase in foreign investment.
European cities remained the most visited by foreign investors, with 12 of the top 25 global targets, followed by seven in the USA and six in Asia.
rising in in-bound CRE activity
Amongst Europeans, Germany ranks highest and, alongside the UK and Switzerland, increased overseas investment last year. France and Sweden are also major overseas players, meaning five of the top 10 source countries are in Europe, with an increased share looking at global not just regional investment.
Paris and Frankfurt closing the gap
Europe has tended to be next on the target list for APAC capital after Asian cities, led as ever by London but with Paris and Frankfurt closing the gap and others such as Warsaw and Prague seeing very strong demand growth.
Offices are the top sector target at 48% of investment, but residential is now number two at 19%. United States and Canadian buyers have again favoured Europe, with office followed by retail and apartments have the top targets.
“In Europe, real estate fundamentals are good but not as well-placed as a year ago. However, with near full employment in many markets, businesses need to invest where they can afford it, to retain and attract talent and drive productivity. Hence with prime supply limited and interest rates down, the cycle will remain positive in the next 12 months,” says the report.
Conditions are highly variable market by market, however, with Central & Eastern Europe and Nordic markets set to out-perform economically over the next three years, while Italy, Portugal, German and Belgium may underperform. Spain is the best of the rest in between these leaders and laggards, followed by the Netherlands and France.
Waiting for the right time to invest in London
The UK should see similar economic growth
While there is a good chance that Sterling is already oversold, it could get cheaper yet, so timing this investment decision is difficult. However, with the worst-case scenario of leaving without a deal apparently ruled out by legislation, the right time to enter may be approaching.
“In the short-term, European offices are well placed to outperform given their supply dynamics, but over the medium-term logistics and residential are favoured with retail variable but subdued.
“Tech-driven markets, east and west, with good universities, will perform best, led by Berlin, Frankfurt, Madrid, Amsterdam, Helsinki, Budapest and
“Demand will continue to grow across a growing range of less traditional sectors, such as health, data centres and student accommodation. Strong performance from rented residential markets, in particular, will encourage investor demand, both in the established markets of Germany, the Netherlands and the Nordics as well as those playing catch up such as the UK and down the line, France.”