The volume of European commercial real estate investment transactions declined in the third quarter as the uncertain economic outlook, rising interest rates and uncertainty over property pricing deterred investors from investing, according to the latest Europe Capital Trends report from MSCI Real Assets.
European commercial real estate registered the seventh consecutive quarter of falling investment in July through September, with no market or sector escaping the slowdown by the end of the first nine months of 2023, MSCI researchers said.
The volume of completed transactions fell 57% in the third quarter from a year earlier to €32.8bn, the report showed. It was the “weakest activity since 2010” and took overall investment in the first nine months of the year to €119bn, less than half the level for the same period in 2022. Pending transactions at the start of October, typically a reliable indicator of sales in the final quarter of the year, were the lowest since 2011, MSCI’s study showed.
Tom Leahy, head of EMEA Real Assets Research at MSCI, said: “The exceptionally rapid increase in interest rates meant that property went from keenly priced at the end of 2021 to overpriced by the end of 2022. Low liquidity and volatility in bond markets have complicated the price discovery process for property, causing a wide disconnect in expectations of buyers and sellers, with negative consequences for transaction activity.”
Quarterly investment volume by deal type and location
Paris remained the year’s top European investment destination as large transactions, such as luxury retailer Hermès’s €230m forward purchase of the Anjou office block from Covivio in the third quarter, limited the decline in investment volumes to 21% in the first nine months.
Pockets of resilience
There were some areas of relative resilience amid the generalised slowdown for Europe’s commercial real estate investment market. Sales of warehouses and senior housing in the first nine months of 2023 settled around the average volumes recorded in pre-pandemic period of 2015-2019. Hotels were the least badly affected real estate sector, down 11% in the first nine months from a year earlier, following notable transactions in the French, Portuguese and Spanish markets as leisure travel rebounded.
For the office sector, there was no respite, however, as the post-Covid shift to hybrid working continues to weigh on investor sentiment. The third quarter marked a record low in terms of the number of properties sold amid concerns about functional and technical obsolescence for buildings that are not best-in-class, according to MSCI.
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