European property markets finished 2016 strongly, experiencing both improving fundamentals and further yield compression, according to Savills.

Savills Investment Management transacted €5bn (£4.4bn) in 2016, including sales and new purchases of nearly €2.5bn (£2.2bn) each, exceeding 2015’s total of €3.4bn (£3bn).

Total activity in Europe totalled €3.9bn (£3.4bn), with €819m (£719m) transacted in Asia. The most active markets for Savills IM were the UK and Germany with transactions totalling €1.2bn (£1.05bn) each.

There were 114 individual and portfolio transactions across 18 countries, including the sale of a portfolio of 17 German office properties with a lettable area of 256,000sqm to WealthCap for €632m (£555m). Savills IM also sold the property portfolio of its German Retail Fund for €320m (£291m) to Patrizia Immobilien AG.

Kiran Patel, chief investment officer at Savills IM, said: “European real estate markets continued to perform strongly towards the end of 2016, experiencing both improving fundamentals and further yield compression. The UK referendum on EU membership changed the outlook especially for this market.

“Rising political and long-term economic outlook uncertainty is pushing investors towards defensive core segments. These assets are expected to benefit from continued demand and should see sustained income returns.” 

Patel believes that investors should focus on longer term trends such as demographics, urbanisation and technology and their continued impact on occupier demand for new micro locations and real estate segments.

“Lower yields may tempt some investors to move further up the risk curve and outside their defined fund style. But we strongly advise investors to consider the intrinsic value of an asset rather than chase yields,” Patel added.