15 June, 2020

Market behaving in line with expectations: record-breaking Q1 followed by a quiet April and May

The continental European commercial real estate investment market has faced a tumultuous couple of months. After the strongest Q1 on record, rationalized by a plethora of deals initiated in 2019 Q4 closing in January/February, COVID-19 stymied investor’s interest. What’s more, the sharp increase in risk premium and consequent pausing of debt markets halted the flow of liquidity for many remaining market players. In April, our forecasting model subsequently predicted a 72% drop in investment for 2020 Q2 relative to the previous three year’s y-o-y average. This figure has proven to be in line with current market [1] activity for which Q2 investment activity was computable on a monthly basis. Our findings point to a two-thirds decline in aggregate volume compared to the same period last year, with that of May seemingly lower than April’s. Despite the preliminary nature of these figures, which are likely to be revised upwards once additional deal information is available, they do offer a good indication of COVID-19’s impact on Q2 investment volumes.  

Full impact will be measurable as summer approaches

As European travel restrictions and lockdowns are starting to loosen, we may expect investors to be able to travel again, ultimately resulting in more deal activity. Therefore, May or June could prove to be a low point in investment activity in Europe and pick up again in Q3. With limited travel possible in recent months, one could expect current deals to have become almost entirely domestic. Looking at the data this cannot be confirmed, as several particularly larger deals (over EUR 100m) were closed by foreign capital during May and June.

In general, we do not see distress on the market. However, summer may provide more guidance as open-ended funds, which have seen an increased call for redemptions, may trigger sales.

Interesting to mention is that Austria, one of the first economies to unlock in Europe, has seen investment activity rising by around 10% versus the same period in 2019. Whether this is a one-off or a trend remains to be seen, but may provide some guidance for the rest of Europe.

Multifamily and Logistics markets reign supreme

In terms of sector splits, we can confirm that multifamily is now the largest sector by volume and has taken the number one position from offices. Multifamily is now the largest asset class on the European real estate investment market confirming the noise coming out of the listed sector and proving that investors are increasingly seeing multifamily as one of the safer bets. The logistics market is also in a strong position to recover as European countries look to shore up domestic supply chains.

From a geographical point of view, it seems that investors are increasingly focused on the core markets. Consequently, some of the smaller and harder hit economies saw limited deal flow in April and May.

[1] Including: Austria, Bulgaria, Croatia, the Czech Republic, Denmark, Finland, Germany, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Romania, Serbia, Spain, Sweden, and therefore excluding: the Baltics, Belgium & Luxembourg, France, Greece, Russia, Slovakia, Switzerland, Turkey, the UK and Ukraine.