London Investment Looks The Sick Man Of Europe Next To Big Rivals

In the 1960s and '70s, Britain was often referred to as “the sick man” of Europe, so dysfunctional had its economy become. Today, the London and UK real estate investment market is looking ill next to its large European rivals in Germany and France, partly due to its response to the actual virus afflicting the world.

The €33B (£30B) invested in Germany in the first half of the year was 50% higher than the €22B invested in the UK, according to data from Real Capital Analytics. The perception is that for many months, capital markets were closed around the world as a result of the coronavirus pandemic, but Germany’s figure represents a 16% increase in deals against the same period last year, compared with a 15% drop in the UK. The market there is very much open, with Germany accounting for 30% of all European deals, an increase on the long-term average. 

London also fell behind Paris in the ranking of city investment in the first half, with €10B invested in the French capital vs €9B in its UK equivalent. While France has also been badly affected by COVID-19 in comparison to Germany, the market is seen as having a momentum behind it that London lacks, as a result of investment in the city’s infrastructure ahead of the 2024 Olympics.

“The disconnect between Germany and London is stark,” CBRE Global Investors Head of UK Strategy and Research Andrew Angeli said. “Discounts are being demanded in the UK, and whilst in Paris or Munich you are now at or better than pre-COVID pricing, in London that’s not true.”

There are many reasons for this, but RCA said the way Germany has handled the pandemic is significant. 

“Germany’s response to the COVID-19 pandemic was, in terms of the number of cases and deaths per capita, more effective than Europe’s other largest economies, namely the UK, France, Italy and Spain,” RCA Senior Director of EMEA Analytics Tom Leahy said. “From a commercial property perspective, the lockdown was both less severe and shorter than in the UK, for example. For a physical asset, this can make the difference between deals being completed or not.”

Leahy pointed to Google mobility data that showed the public travelling far more for work and leisure in Germany compared to the UK. That makes it easier to determine how much people will use a property in the post-pandemic era, whether it will remain in demand, and so how much to pay for it. 

On a basic level, it also makes it easier to physically inspect a property, which remains a key element of getting a deal done. And in that sense, Germany’s deep domestic investor base has been a lifeline, with more than 60% of deals in the first half involving both the buyer and seller being from Germany.

“The fact that German investors, both listed and institutional, have continued to buy German property contrasts starkly with the UK, where domestic investment levels have plunged in the face of the COVID-19 crisis,” Leahy said. “This also reflects the difficulties presented by the travel restrictions, which have left a substantial shortfall in city markets that are most dependent on overseas money.”

And because of its more robust economy, Germany was able to provide a much larger stimulus package than other European nations, equating to 13% of gross domestic product, compared to 8% in the UK and 4% in France, Leahy said. 

Q2 was the worst quarter ever for central London office deals, RCA data showed, with the dearth of international investors a particular problem for this market.

“The UK has always attracted overseas capital. Post-[global financial crisis], this influx helped liquidity in the bigger cities, especially London, which led to faster price recovery,” Leahy said. “The ongoing restrictions on movement may mean that this beneficial overseas capital flow may not move in to support pricing once markets reopen. In addition, worsening political relations with China would seem to limit or even preclude investment from Chinese entities and, by extension, Hong Kong firms. Hong Kong capital had helped London ride through earlier Brexit bumps.”

RCA also pointed to the example of Denmark as a country which has dealt well with the impact of the coronavirus, and seen investment perform well as a result — the €3.1B invested in the first half in Denmark is almost double the figure for the same period in 2019. 

“That the Danish commercial property market has remained relatively open may be due, in part, to the way the country has handled the viral outbreak,” Leahy said. “Cases and deaths per million are below most other European countries and Google mobility data show the scale of lockdown was less severe and shorter than some other western European countries.” 

It is overly simplistic to put the difference between investment volumes in the UK and Germany entirely down to the handling of the coronavirus, and across Europe, the correlation between the two things is not exact. 

What’s more, the UK market is clearly starting to open up, with £1.3B of deals completed in London since the start of July, RCA said. 

But the facts are stark. Germany is emerging from the coronavirus as Europe’s real estate investment powerhouse.