Economic & political background

Greece has been the main focus of the European Union in the second quarter with the possibility of a Grexit becoming increasingly likely. Despite some volatility in bond yields in Q2 and concerns about contagion in the economies of Southern Europe, the magnitude of the impact has been limited compared to four years ago. The Quantitative Easing programme launched by the European Central Bank in March has provided support to bond markets keeping interest rates low and limiting the rise in yields mainly to Greek bonds.

Despite the Greek debt crisis, a preliminary estimate shows that the Eurozone GDP in the second quarter increased 0.5% qoq. GDP growth is mainly driven by domestic demand and we expect this will continue for the next 18 months, notably fuelled by an improvement in private consumption and an expected rebound of gross fixed investment. The European labour market is also slowly brightening mainly driven by progress in countries with high unemployment rates, notably Spain. In the Euro Zone the number of unemployed dropped in May bringing the unemployment rate down to the lowest level in three years at 11.1%.

H1 reached another peak

As we predicted in our last Market in Minutes, strong investment activity in Q1 continued during the second quarter of the year. The investment volume across the 16 countries covered in our report totalled approximately €48bn in Q2, which brings the turnover for the first half of the year to nearly €102.5bn. This is the highest first six months since 2007 and almost 25% higher than the same period last year.

Compared to the situation 12 months ago, the investment landscape is relatively uneven. Portugal (720%), Norway (391%) and Italy (154%), have recorded the strongest rises in investment volumes over H1 15 notably thanks to the return of international investors, particularly equity funds from the US, acquiring retail portfolios or landmark office buildings. On the opposite side of the spectrum, investment activity in Greece (-95%), Poland (-43%), Denmark (-40%) and France (-31%) slowed either due to the lack of large properties or portfolios available on the market or due to deals postponed to the second part of the year.

Investors continue to favour core markets with the UK, Germany and France still accounting for 67.8% of the total volume. However, the share of the top 3 countries is slowly decreasing (71.8% in H1 2014), due to increasing investor interest for non-core countries, which offer attractive pricing and supply of large assets and portfolios. Overall investors are more open to move up the risk curve. They seek future yield compression by targeting secondary or alternative assets in core capital cities, or prime assets in regional cities or secondary markets.

Offices and retail prevail

The office sector continues to dominate the investment activity in most countries capturing about 39% of the transaction volume per country on average. The only exceptions where retail properties accounted for a higher share of property investment deals were Portugal (83%), Norway (62%), Netherlands (43%), Finland (43%) and Germany (42%) which saw the sale of large-scale retail portfolios in the past quarter.

It is interesting to note the rising share of 'Other' commercial sectors in the commercial investment activity of a number of countries. In the UK (36%), France (21%), Ireland (33%), Belgium (25%), Sweden (23%) and Austria (21%) the allocation to alternative assets such as student housing, hotels, care homes and other has exceeded 20% of the total.

^{Source: Savills European Research}

Overseas investors invest in large portfolios

Cross border investment increased in nearly all countries and especially in the peripheral markets where US investors have been particularly active. The share of non domestic investment ranged from 10% in Sweden to over 80% in markets such as Italy, Poland and Portugal. Overall it is observed a strong inflow of money from the US and a rising activity from Asia. With regards to the total cross border investment, on average the share of US money into our survey area in Q2 15 was about 40% per country and can be as high as 93% in Portugal, 77% in France and 66% in Ireland. The share of Asia Pacific investors has been quite significant in the UK (29%) and Italy (27%). The presence of Middle Eastern investors in the second quarter was more prominent in Spain (15%) and Italy (8%).

High pressure to invest has led to a shift towards larger transactions. According to RCA data, in Q2 portfolio deals accounted for 46% on average per country up from 37% in Q1 and 40% last year. Most significant rises in portfolios deals were noted in the Nordic markets and Germany. As a result in H1 15 the share of regional markets has risen to more than half of the total volume in each country, compared to about one third last year on average. In some countries the share of the regional markets was quite high such as Italy (90%), Poland (79%), Sweden (69%), France (65%), Norway (62%), Belgium (56%) and even in the UK (55%) where investors are also looking outside the capital city.

^{Source: Savills Research core = DE, FR, UK periphery = IT, ES, IRE, GRE}

Prices continue to rise

Property prices continue to rise attracting more investor interest and pushing yields down. The average prime CBD office yield in our survey area has dropped this year below the past 10-year low, which was recorded in Q3 07 at 4.71%. In Q2 15 it has dropped to 4.57%, 48bps below last year and 11bps below the last quarter. The average prime shopping centre yield has similarly moved in by 43bps yoy and 13bps qoq and the average stands at 4.92%, which is still 5bps above the 10-year historic low. Average industrial yields have dropped by 44bps yoy at 6.71% and are 9bps below Q1 15.

Since Q2 2012, the yield gap between the core markets and the peripheral markets of Europe has been closing, reflecting improving investor confidence in the markets of Ireland, Spain, Italy and more recently Portugal, which have gone through the toughest periods of austerity and reforms and now show signs of improving economic performance. On an annual basis the average prime yield in the peripheral markets moved in by 66bps while in the core markets by 50bps. The rising interest in core plus and value add investments has translated into secondary yield compression as well. The average CBD secondary office yield in our survey area has moved in by 30 basis points yoy. However the yield gap has not started narrowing yet due to the fast rise of capital values for the best assets.