London Frankfurt

Investors weigh London and Frankfurt prospects

Friday, October 14, 2016

Investment activity in London dipped dramatically in the lead-up to last June’s Brexit referendum, but still outdistanced transaction value in Frankfurt, the presumed top rival for Europe’s financial market business. Avison Young’s recently released commercial real estate investment review for 51 markets in Canada, the United States, the United Kingdom and Germany reports a 57 per cent decline in central London sales values during the first half of 2016 compared to the first six months of 2015.

Foreign investors were prominent purchasers in deals totalling £6.9 billion (nearly €9 billion as of June 22, 2016), accounting for 64 per cent of transaction volume. Cap rates for downtown class AA office, suburban class A office and single-tenant industrial remained stable, but dropped slightly for multi-tenant industrial and tier 1 regional malls.

Avison Young analysts foresee “further uncertainty” as an outcome of UK voters’ majority decision to withdraw from the European Union, in part related to the 10 large open-ended property funds that had to suspend trading within days of the referendum result. “There is likely to be a small pricing correction in the second half of 2016 as the retail funds look to satisfy redemptions through forced sales, but this situation is unlikely to be a drastic or long-term trend,” the report predicts.

On the flipside, it suggests the weakening of the UK pound sterling (now equivalent to €1.11 or about CAD $1.60) will entice foreign buyers, particularly those with U.S. dollars or Japanese yen to spend.

Office properties are seen as the chief lure for investors in both London and Frankfurt, although supply has been scarce in the home of the German stock exchange. This is reflected in a significant decline in total transaction value, from €2.6 billion in the first half of 2015 to €1.2 billion for the same period this year.

The €400-million sale of the IBC office complex was the single largest transaction, with prices then dropping steeply to just slightly more than €11 million for the fourth biggest deal of the half. “Depending on current political developments in Europe, investment volume will remain elevated,” the Avison Young report projects.

Office cap rates in Frankfurt dropped to 4.1 per cent in the first half of 2016, down from 4.4 per cent in the corresponding period of 2015, while retail cap rates fell even lower, to 3.8 per cent. Although only 3 per cent of total transaction value involved retail properties, the €11 million sale of Lorscher Strasse 41 did make the list of the top five sales by price during the first half.

“As demand is strong for retail, a rise in investment volume in the latter half of the year is likely,” the report suggests.

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