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.  With the continued flow of new capital, new retail fund launches, the up-weighting of real estate allocations and with continued investor confidence we expect volumes in 2007 to match 2006.  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.” 

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. 

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.  As a consequence derivatives may become an increasingly credible option for those with the inclination to hedge their bets.”

Destination of Capital

• 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.
• 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.   

Purchaser and Vendor Source of Capital

• UK investors were the main purchasers in Europe, acquiring €63.4 billion of real estate, with the majority of this (78%) in the UK.  Global funds invested €46.8 billion, more than double their level in 2005. 
• Irish investors were particularly active acquiring over €13 billion of real estate, with the majority spent in the UK (€6.3 billion) and Ireland (€4.3 billion). 
• German investors were significant net sellers of real estate in 2006, with net sales of €42.3 billion.  Sales totalled nearly €56 billion of which three quarters was in Germany itself.  Net outflows of over €7 billion from the open ended funds were recorded by BVI in 2006, prompting sales activity by a number of funds, whilst others took advantage of the active market to rebalance their portfolios.  Greater purchaser activity is expected from German investors in 2007 as they up-weight their portfolios in Europe and further afield.
• Stronger activity was recorded from the Asia Pacific region, equating to over €7 billion of investment.  A high proportion of this activity (€5 billion) was from Australian sources of capital, the majority of which came through Listed Property Trusts (Australian REITs) which are choosing to make overseas acquisitions in order to grow and add value, given the limited availability of product and already highly securitised nature of their domestic market.

Investor Types

• Unlisted vehicles were the main purchasers across Europe acquiring over €88 billion of real estate. €34 billion alone was acquired by global unlisted funds, reflecting the continued growth and strength in the indirect market. 
• 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.
• Belgium benefited from the sale of a government portfolio totalling €576 million to the Belgium SICAFI Befiimmo. 
• 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). 
• Corporates sold over €20 billion of real estate in 2006, of which half (€10.2 billion) was in Germany.  The majority of corporate disposals in Germany were sale and leasebacks, and activity was dominated by retailers who accounted for 90% of sales; notably the various Karstadt sales which totalled €5 billion.