EUROZONE: A slow start

Given that this column – along with many other market commentaries – has consistently talked up the attractiveness of the European real estate marketplace, 2016 transaction volumes look pretty terrible.

According to analysis from property services firm JLL, weaker market sentiment and risk-averse buyers were responsible for a 20 percent fall year-over-year in the first-quarter 2016 transaction volumes.

Within the EMEA region, the UK suffered the heaviest loss, with a 37 percent decline in property deals. France was next, down by 30 percent. Of the largest three markets, Germany was the best performer, recording a relatively benign 7 percent drop.

Sellers of UK property have been hamstrung by the impending ‘Brexit’ vote. Real estate investment managers speaking to PERE said that with the upcoming referendum on whether the UK should retain membership to the EU, the real estate community has been noticeably reticent about pulling the trigger on UK property deals.

In fact, one UK-based corporate lawyer said he has a deal running at the moment which is conditional on a ‘yes’ vote and the UK remaining part of the EU.

PERE has also heard of some sovereign wealth funds putting a hold on all London investments until after June, when the result of the referendum is known.

Elsewhere in Europe, there remains a nervousness that firms will overpay as the market ticks further along the cycle. There is a defensiveness playing out among would-be buyers as no one wants do any brand damage and close a deal which, with the benefit of hindsight, would seem overpriced.

As such, deal processes are becoming even more complicated and time-consuming as groups wrangle over pricing. The lawyer said that he is seeing most offers coming in below the level expected by the seller, who is holding out for the time being.

However, the first-quarter numbers do not tell the whole story. The transaction volume percentage drop is also skewed by last year's first-quarter results; which were the strongest start to a year since 2010.

Combined with what is always the quietest quarter of the year, the results then do not look so weak.

And in fact, despite the overall downward trend, there were pockets of growth in transaction volumes within the Nordics, Benelux and Central and Eastern Europe.

Indeed, capital is still pouring into real estate strategies focused on the region. Many macroeconomic factors are still making European real estate one of the most attractive asset classes to park capital.

For starters, the euro is still viewed as cheap compared to a strong dollar and the low interest rate environment in Europe looks likely persist as the European Central Bank continues its quantitative easing program.

The fact that interest rates are widely accepted to be low for longer-term buyers of fixed-income real estate is also expected to keep investment volumes high in Europe.

Meanwhile, Europe remains awash in capital eager to deploy in the region. Europe-focused managers with above average track records are blasting through fundraising targets. And that’s not even including the big US players doing deals this side of the Atlantic.

Take The Blackstone Group, as an example. At the end of March, the New York-based alternative asset manager held a first close for its latest European opportunistic fund, garnering $4.97 billion in commitments towards a $6.7 billion target.

Not to mention that significant levels of European fundraising which occurred in 2014 and 2015 remain unspent. According to INREV research, €63.1 billion, or 51.1 percent of the total capital deployed to private strategies last year, is directed towards the region.

With so much dry powder trying to find a home, and many European funds having started their investment periods, there is pressure to get deals done.

As such, market commentators predict that despite the slow start to the year, European real estate volumes this year will eventually catch up to 2015 levels.

While the market will retain its nervousness as we continue to edge closer to a cyclical peak, there is still cause for optimism among the caution.