Direct investment into real estate in Europe reached record levels in 2006 with total transaction volumes of €242 billion for the full year, according to Jones Lang LaSalle...

Direct investment into real estate in Europe reached record levels in 2006 with total transaction volumes of €242 billion for the full year, up 39% on 2005, according to Jones Lang LaSalle’s latest European Capital Markets Bulletin.  This number represents the biggest volume increase (€68 billion year on year) ever recorded. Cross border transactions have surged in volume terms, reaching around €150 billion (approximately two thirds of the total) in 2006.

The majority of European countries have seen rising volumes in 2006, with volumes in Germany rising by 141% to €49.5 billion and France by 67% to €24.1 billion.  This contrasts with static volumes in the UK totalling €80 billion in 2006.  Elsewhere in Europe, Russia has witnessed a huge increase in volume of over 700% to reach €3.4 billion.  Volumes are also up over 70% in Poland to €5.1 billion as investors move further east and up the risk curve in pursuit of growth and value opportunities.

Tony Horrell, CEO of European Capital Markets at Jones Lang LaSalle commented: “Investors in European real estate in the past couple of years have been rewarded with record returns.  Demand continues to be fuelled by investors up-weighting their allocation to real estate, which has outperformed equities and bonds over the last 1, 3, 5 and 10 years.”

Nigel Roberts, Chairman of EMEA Research at Jones Lang LaSalle added: “Looking ahead we see lots of reasons to expect strong levels of investor demand to continue in 2007.  While pricing is close to the top, we expect to see a little more yield compression in the first half of the year across the majority of markets."  Roberts added: "The arrival of REITs in the UK, Germany and Italy and further developments planned for France and the Netherlands will add momentum to the market.”

The big three continue to dominate activity

The big three (the UK, Germany and France) markets continue to dominate activity, accounting for 64% (€154 billion) of total volumes, with Germany and France increasing their share of overall activity.

Inter-regional investment has risen significantly in 2006, particularly from Global, American and Asian (predominantly Australian) sources of capital.  Combined inflows from these regions totalled €67.8 billion, more than double their level in 2005.  The core focus of activity has been towards the major markets of UK, France and Germany.
Volumes in Central and Eastern Europe (CEE) more than doubled to €13.3 billion, with Russia recording a huge increase in volume of over 700%.  Russia is now the second largest market in the CEE with volumes of €3.4 billion, behind Poland (€5.0 billion).

We continue to see growth in other core markets across Europe.  Ireland recorded a growth in volumes of over 110% reaching €4.4 billion in 2006.  Spain recorded volumes of €7.8 billion, 63% higher year on year.  The Nordics also maintained their position as a leading region for investment with volumes of €30.8 billion.  Markets such as Luxembourg, which has a smaller investible universe, saw greater levels of growth; Luxembourg volumes were nearly €1.3 billion.

Tony Horrell concluded: “Although the performance of real estate is set to be lower in 2007, it will remain attractive on a relative basis compared both equities and bonds – our central scenario is for real returns across Europe of 9-11% in 2007.  This is below the performance of recent years and will test the nerve of some investors.”

The REIT stuff

Listed REITs are now beginning to have a major impact on real estate markets across Europe, driven primarily by the evolution of the French SIICs.  Favourable tax advantages offered to any investor selling to a SIIC in France led to over €8.9 billion of acquisitions by SIICs (30% of total volumes in the French market).  In 2006 15 new vehicles in France were launched in France.

In contrast the UK saw lower volumes of activity from the major listed companies as they prepared for conversion to REIT status; acquisitions in 2006 totalled €2.5 billion compared with €4.1 billion in 2005.  The fact that the entry charge is based on gross asset value, rather than capital gains, has meant companies were more selective in their sales and acquisition strategy during 2006; there were more sales in 2006 (€3 billion) compared to 2005 (€1.4 billion).