European commercial property investment markets remained in the deepfreeze in the opening quarter with volumes 31% down on Q4 2011 at €25.3bn. Year on year volumes fell marginally, by 1.5%, to €121.5bn in the year to March 2012. Foreign investors pulled back from the market to a slightly lesser degree than domestic players, and as a result saw their market share rise to 37% from 35% in 2011.

Offices were the strongest sector over the year, with volumes rising 19% on Q1 2011 compared to a 55% fall for retail and a 35% drop for industrial.The main areas of growth in activity have been in the Nordics, Poland and Switzerland while France, Italy, the UK and the rest of Central Europe dropped back after a busier Q4 2011.

Prospects for the rest of the year are being trimmed but there is still some confidence that increasing levels of stock and a growing need to act will lead to a firming in the market as the year goes by.

Investment in the European commercial property market in Q1 2012 fell to its lowest level since Q1 2010 according to the latest research by Cushman & Wakefield, the world's largest privately held commercial real estate services firm.

Michael Rhydderch, Head of Capital Markets EMEA at Cushman &Wakefield, commented: "It is not unusual for volumes to fall in the opening quarter - on average since 2006 they have dropped nearly 16% compared to Q4 in fact - but this is not just a seasonal lull, with volumes falling more and falling compared to the same period of last year - which in itself was no high point. There are still plenty of new investors coming into the market, with foreign buyers more dominant than domestic players over the last quarter. However, a shortage of stock, of debt finance and of confidence is holding the market back by perhaps more than we expected given the level of equity demand and the momentum at the start of the year."

The banking sector is the centre of attention but is pulling in different directions, on the one hand promising to feed investors with stock as deleveraging and asset sales pick-up, but on the other enforcing a strict diet due to the near freeze on new lending.

Rhydderch continued "Attention to detail is key in looking at all opportunities including loan portfolio and bank sales - with the property fundamentals vital to getting the financing and pricing right."

Retail has been the hardest hit sector by the slowdown in activity, with its market share dropping to just 22% versus an average of 32% during 2011. Offices, by contrast, have jumped up to 53% as against an average of 45% in 2011. Industrial has been relatively stable with an 8.3% share (8.9% in 2011). Demand and activity patterns have been far from uniform around the region, with the Nordics, Benelux and parts of Eastern Europe holding up best. By country, Norway, Switzerland and Poland are up on Q1 2011 and notably also up on the busier final quarter of last year. Spain, Sweden and Finland meanwhile failed to match their performance of late 2011 but are at least ahead of the opening quarter of last year.

The Nordic region saw volumes rise 66% on the same quarter of last year as investors have been drawn to its better risk and growth profile and in particular a better relative standing on government debt. Sweden is generally the main target of interest and by far the largest investment market in the bloc but investors are looking further afield, with Norway in particular seeing increased demand and activity ramped up to its highest quarterly level since 2008 in Q1.

Markets such as Belgium, the Netherlands, Germany and Russia have been relatively solid meanwhile while France, Italy, the UK, Portugal, Czech Republic, Hungary and Slovakia all saw marked falls. Parts of the CEE market in particular have been hard hit by a shortage of debt finance but a lack of prime stock has also held investors back. That should change as the year progresses however, and notably so in Poland, as a range of retail and office opportunities are coming forward.

Interestingly, despite an increasing focus on 'core' assets, the big three: Germany, France and the UK, lost market share in the last quarter - dropping to 58.6% versus 62% last year, their lowest combined share since Q2 2009. However, while the core has lost out, so too has the fringe, with the GIIPS countries (Greece, Ireland, Italy, Portugal and Spain) seeing their market share drop to 4.3% as against 5.3% last year and over 11% in 2009.

Germany is the most buoyant of the three core markets meanwhile, albeit a reduction in larger deals masks this somewhat in the latest quarterly figures. The top five cities of Munich, Hamburg, Berlin, Dusseldorf and Frankfurt remain most in demand, while foreign buyers have been the key driver of growth, seeing their market share rise to 43% from 31% in Q4 2011.

 Offices were the strongest area of activity in Germany, taking 44% of all monies invested, but as in some other markets, retail is being held back by a shortage of the right quality of stock for investors to buy. Alongside the UK, Germany dominated retail investment in the quarter, with the two accounting for 54% of all retail market activity. Russia was the only market coming close - with €942mn invested versus €1.1bn in the UK and €1.5bn in Germany. Belgium and Poland were the fourth and fifth largest markets, with €272mn and €211mn invested respectively.

While the UK may have lost its retail crown to Germany, it remains far and away the largest European office market - with €5.1bn invested in the quarter versus €2.4bn in Germany, €1.3bn in Norway, €1.2bn in Sweden and €0.9bn in France.Market concentration is however slightly lower in the retail sector, with the top five accounting for 79.8% of all trading versus 81.3% in offices in Q1. Thanks to the huge dominance of the UK, the top five industrial markets have a yet higher market share of 84%, with the UK (€1.1bn) followed at some distance by Germany (€352mn), Switzerland (€180mn), Poland (€97mn) and France (€92mn).

 Looking forward, David Hutchings, Head of European Research at Cushman & Wakefield, commented: "At the beginning of the year we forecast investment would increase in the second half after a slower start and hit something like €24bn for the year. That forecast is now under threat with at least some of the Q1 underperformance not expected to be made up.

"For now however we remain confident of better activity levels in the months to come and have only edged down the forecast to €120bn. Nonetheless there are clear and growing risks that this adjusted forecast will not be met - particularly if economic confidence wanes and improvements in the outlook for the sovereign debt crisis recede any further."

Commenting on demand, Hutchings continued "Secure yields are fundamentally attractive in a world of low interest rates and now slowing inflation. Income growth will undoubtedly be slower in the year ahead however and negative in some cases as less productive property is found out. However returning business confidence - hopefully - and less new development, should limit the downside threat to rents and occupancy ahead of an eventual return of more robust economic growth in 2013."

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