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Middle East funds breathe new life into European property market

Middle East funds are helping to drive European commercial property yields lower as they join a rush of international investors snapping up real estate on the continent.

The spending spree, which is approaching pre-financial crisis levels, dominated the annual gathering of European property professionals at the MIPIM conference in Cannes last week.

The volume of commercial property deals across Europe last year was the highest recorded since 2007, according to the property agent CBRE.

Last year about €165.6 billion (Dh838.99bn) of deals were transacted across the continent – a 30 per cent rise on 2012.

Hard-hit euro-zone markets such as Greece, Ireland and Italy have bounced back strongly.

Transaction volumes in Greece rocketed by more than 1,000 per cent, according to Savills, the international property consultant. However, that came from a very low base and was boosted by a €900 million sale of public assets. In Ireland, volumes grew 210 per cent, and in Italy they were up 138 per cent. In the United Kingdom, volumes rose 43 per cent and in Germany volumes rose 20 per cent.

“Overseas investors are driving activity in many European markets,” said Marcus Lemli, the Savills European investment chief. “Non-European buyers have increased their share of the region’s investment volume to almost 30 per cent, up from 25 per cent in 2012. This can be attributed to the investment preferences of global buyers currently active in Europe.”

Savills reported that prime city centre office yields in London, Paris and the top six German markets have returned to 2007 levels, reflecting an average of 4.2 per cent at the end of last year. Across Europe as a whole, city centre prime office yields fell for the sixth consecutive quarter at the end of last year to an average of 5.2 per cent – a contraction of 19 basis points on the final three months of 2012.

The news comes amid a flurry of property investment deals from Middle Eastern sovereign wealth funds in Europe.

They completed seven major direct property deals worth a total of US$5.6bn last year, the largest of which was the Kuwait Investment Authority’s $2.7bn deal to buy the 5.2-hectare More London office and restaurant complex near London Bridge.

Other significant deals on the list included Kuwait Investment Authority’s $594m purchase of the 515,000 square foot 5 Canada Square office block in London’s Canary Wharf and Qatari Diar’s $261m deal to buy the W Hotel in Barcelona.

“If last week’s MIPIM show was guilty of anything it was guilty of displaying an overexuberance,” said Chris Brett, the head of international capital markets at CBRE. “However, this comes from a very low base as European property markets have been depressed for a long time.”

“There is definitely an increase in appetite from Middle Eastern sovereign wealth funds at the moment – along with Asian and US investors – partly because they see a recovery story but also because they see more political stability at home,” Mr Brett added.

“Yes, there is also an increase in the appetite for risk, but with Middle East sovereign wealth funds we tend to see them buying the really prime assets in the best areas to hold over the long-term while other investors tend to invest higher up the risk curve.”

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