A SHORTAGE OF VENDORS
Economic overview
Europe’s second wave of coronavirus continues to dominate the economic headlines and shape the impact of the recovery as the European economy chugs into the final quarter of the year.
Economists are anticipating the European Central Bank will provide more monetary support, lifting the PEPP (Pandemic Emergency Purchase Programme) from €1.35 trillion to €2 trillion in December 2020, providing a further cash injection to stimulate demand and avoid a deflationary spiral. However, less than half of the €1.35 trillion PEPP has been invested thus far, so there is still more unallocated capital from the asset purchase programme to boost the eurozone economy.
This will aim to maintain business confidence levels, and ultimately job stability once furlough schemes are withdrawn over the next two years. Latest evidence indicates that the eurozone unemployment rate rose to 8.1% in August, up from the pre-Covid low of 7.2%. Focus Economics anticipates that the unemployment rate will peak at 9.5% during Q1 2021, and for eurozone GDP growth to rebound by 5.3% in 2021, following a 7.9% decline in 2020.
Investment
European commercial and residential investment volumes reached €44.5bn during Q3 2020, marking a 19% increase on Q2 2020, although a 33% decrease on the five-year average for the third quarter. Year to date (YTD), investment transactions volumes have reached €164bn, down 15% against the Q1–Q3 five-year average of €192bn (see chart, below).
Office investment volumes YTD fell by 26% to €55bn YoY, retail investment fell by 11% YoY to €24bn and logistics investment fell by 8% YoY to €22bn. Multifamily has proven to be the most resilient sector during 2020, representing a 3% fall YoY to €27bn and remains the second most active sector so far this year.
Investor activity across different asset classes has changed tack over the course of the year. The share of office investment has fallen from 40% in 2019 to 34% YTD during 2020, as we observe proportional increases in retail (from 13% to 15%) and multifamily (12% to 17%). A shortage of prime logistics stock continues to frustrate buyers, as logistics’ share rose from 12% to 13% of total transactions.
At country level, investment transaction volumes have varied during Q1–Q3 2020 against five-year averages (see chart, below).
Germany (+8%) and the Central Eastern European (CEE) countries of Poland (+23%), Romania (+17%) and the Czech Republic (+4%) recorded increases during 2020, which can be aligned with a relatively lower infection rate per capita during the first wave of the coronavirus in the CEE. In Portugal, 64% of the €2.1bn investment transactions so far this year has been portfolio deals, including a large retail portfolio during Q1 2020. Brexit negotiations continue to stymie UK investment, although the UK did observe an 85% quarterly rebound in transaction volumes across the three main commercial sectors.
However, delving deeper into the analysis, there are more structural factors at play here. Poland’s €1.9bn of logistics investment has already made it a record year for the sector, accounting for 48% of YTD transactions, as online retail spend was boosted by national lockdowns. In the Czech Republic, a €1.3bn of multifamily investment transacted during Q1 2020 boosted total activity, despite more modest Q2 and Q3 volumes. Romania office investment has reached €407m so far this year, marking the strongest year for Romanian office investment since 2007.
The UK market share has fallen from 27% to 20% of Europe’s total activity, as German activity rose from 28% to 34% of total activity
Savills European Research
Over the last five years, Germany (28%) and the UK (27%) have dominated the market share for investment activity in Europe. However, during 2020, the UK market share has fallen from 27% to 20% of Europe’s total activity, as German activity rose from 28% to 34% of total activity. France remains in third place, accounting for 11% of total activity so far this year, down on last year given the weight of Korean investment targeting the French capital in 2019, although this is still above the five-year average of 10%.
Cross-border activity
Travel restrictions have limited cross-border investment in Europe during 2020, although the reduction has not been as dramatic as some would have anticipated. Cross-border transactions fell from 50% to 46% of total activity, according to RCA, accounted for by an increase in private investment activity from 16% to 19%. Another factor at play here is the strength of the euro, which has risen from $1.12 at end 2019 to $1.18 in late October 2020, reducing non-European bidders’ competitiveness.
The 'flight to familiarity' among cross-border investors is reflected in the fact that EME (European and Middle Eastern) investment has risen from 56% to 63% of total cross-border activity, as US (30% to 27%) and Asia Pacific (14% to 11%) both fell proportionally. We are now beginning to see more examples of non-European investors looking for European based equity partners with local expertise in order to deploy capital.
Due to the shortage of openly marketed, single-let prime product available in the market, we have observed a rising proportion of portfolio transactions taking place. In France and Germany, for example, a combined 44% of transaction volumes were accounted for in portfolio deals, up from 34% in 2019 as investors seek to scale up and deploy dry powder. Due to the extent that investors are looking to increase exposure to the logistics sector, we are observing a premium placed on larger core-plus/value add portfolios.
