Downward yield movements becoming scarcer With prime yields across Europe having been on a downward trend for nearly four years, further falls are now becoming scarcer. Of 159 location/sector combinations monitored in Q1, only thirty-six saw yields move lower compared with an average of sixty-five each quarter through 2015. Notable market that saw yields fall in more than one sector over the quarter were Brussels, Prague, Amsterdam, Helsinki and Stockholm. Rental increases remain patchy, perhaps affected by heightened economic uncertainty in some markets. Office rents rose in Berlin, Dublin and the City of London, retail rents in Milan, Rome and Budapest, and industrial rents in Dublin, Stockholm and Istanbul.
€3.7bn of investment in Europe for Q1 2016 – the second greatest hotel deal volume ever recorded for the opening quarter of the year. Germany Q1 hotel transaction volume +17% year-on-year UK records highest country Q1 hotel deal volume – €1bn London’s supply risk – West End and Kensington least exposed Italy shows encouraging signs for a liquid 2016 Paris – Investor demand remains strong as performance declines begin to slow
While investor demand will remain strong in 2016, the ‘froth’ is coming off, with a closer balance between investors expanding their acquisitions and those reducing their activities. There was a big increase in interest in countries and cities in the CEE. At the sector level retail gained in popularity compared to last year, but the jump in interest in investment in the residential sector stood out.
Our latest annual debt review provides comprehensive analysis of 2015’s trends and considers how and why 2016 may be different. Our key conclusions are: Last year, new lending doubled, rising to €127 billion based on a record €273 billion of CRE investment. Lending margins were generally stable for bilateral lending and LTV levels stayed low, by historic standards. Despite the rise in new debt issuance, the total value of European CRE debt in 2015 was only slightly higher than in the previous year, at €1.1 trillion, because new lending was offset by the retirement of existing debt. NPL activity was robust. Sales were up 23% in 2015 to €85 billion. Dry powder for loans and distressed assets is high and pressure is rising on European banks which have yet to address long-standing, non-core loan books, meaning the pace of deleveraging will continue. Investors have become more cautious. This change in sentiment is a factor in a slowdown in 2016 investment activity and is likely to affect loan pricing.