Asian real estate investors remain active in European markets but are taking a cautious approach to analysing new opportunities.

However, there are signs that the market is recovering somewhat, sparked by initial interest rate cuts from the ECB and Bank of England, which may encourage greater levels of conviction from Asia Pacific investors.

Rising interest rates across continental Europe and the UK have pushed down real estate values across the board and made financing more challenging, leading to a significant drop in transactions: Savills data show that European real estate investment volumes more than halved year-on-year to €148 billion ($165 billion) in 2023.

Even in more liquid markets, such as London’s City and West End, there is a lack of major deals. “The average deal size in the West End is down to £31 million ($40 million) this year whilst in the City is stands at just £22 million, driven by a dearth of £100 million-plus deals, although there have been some more positive signs around the midway point of the year and robust pricing for best in class assets” says Oliver Watt, Director in Savills Global Cross Border Investment team.

Part of the problem is a lack of motivated sellers, as banks have tended to be more lenient with refinancing. For example, a Korean investment manager had been set to sell 20 Old Bailey, a City office building, to an Indonesian investor for £240 million, £100 million less than it paid for the asset in 2018. However, the vendor is reported to have pulled out of the sale in order to refinance and wait for a better market.

Additionally, investors have been cautious about the office sector, where large lot sizes abound, even though European cities have witnessed a healthy return to physical occupancy in the office.

Continental Europe has also experienced a material slowdown in the number of larger ticket transactions. However, there has been sporadic evidence of Asia Pacific investors buying in mainland Europe; for example Singapore’s City Developments Limited acquired the Hilton Paris Opera Hotel from Blackstone for €240m.

James Burke, Director in Savills Global Cross Border Investment team, says: “Spain, Portugal and France have become key targets on the continent as strong tourism performances across southern Europe have helped to underpin a rosier macroeconomic outlook.”

He adds that the living sectors on the continent, in particular multifamily and student housing, are drawing interest from APAC investors due to a combination of perceived resilience through cycles as well as them being immature sub-sectors affording healthy growth potential.

Watt says that certain APAC investors who have already invested in the UK and Europe may be inclined to exercise higher degrees of caution due to legacy issues in their existing portfolios. This is somewhat compensated for by new entrants looking to enter the European markets, even if they haven’t sealed a deal yet.

“Asian investors have tended to be cautious,” he says. “Some have gone for West End assets and found themselves outbid by US private equity, which has been more aggressive on their underwriting of West End office and retail.”

Overall, the UK remains the preferred destination for Asian real estate capital, says Burke, because of the market’s liquidity and transparency, and because values typically adjusted faster there. “The UK also acts as a landing stage for investors who wish to grow their exposure to other European real estate markets.”

How the rest of 2024 pans out will depend to a large extent on further cuts in interest rates, which are expected to continue, but slowly. Savills research predicts 2024 investment volumes will rise to €160-175 billion and Asian investors are likely to be part of that rise in volumes.

Further reading:
Spotlight: European Investment – Q2 2024 Preliminary Results