European commercial real estate investment continued its downward trend in the first quarter of 2024, marking the seventh consecutive quarter of decline, according to a report from MSCI Real Assets.

The latest Europe Capital Trends report from the investment data and analytics services provider highlights that investments fell in the first three months of the year as many buyers and sellers remained unwilling to transact given the “uncertainties over pricing”.

The report showed that the volume of completed transactions from January to the end of March 2024 was down 26% from a year earlier to €34.5bn, the lowest level since 2011.

According to MSCI, expectations that the European Central Bank might start to cut interest rates in the Spring proved too optimistic, as 5-year swap rates continued to move out through the first three months on the year, “impacting debt costs for commercial real estate”.

“Meanwhile, pricing in many market segments has not fully adjusted to reflect the higher interest rate environment and subdued economic growth. Combined, these factors deterred prospective buyers and persuaded many property owners to delay sales to avoid crystallising potential losses,” the report added.

Tom Leahy, the head of EMEA real assets research at MSCI, said: “After a very slow 2023, there were hopes that European property investment would start to pick up in the first quarter of 2024, but the continued and sometimes painful readjustment to the end of historically low interest rates means the market remains a difficult place in which to transact.

“Buyer and seller price expectations have diverged and until interest rates start to come back down or the growth prospects for European economies improve markedly, the price gap is likely to remain in place.”

The office market, which represents Europe’s largest real estate sector, recorded a 45% year-on-year transaction volumes decline to €7.6bn. Sales activity during the period in the major office markets of London, Paris and Germany dipped to the lowest since the GFC or to record lows in first-quarter 2024.

“Indeed, the collapse in office transactions was the chief cause for overall investment volumes in France falling 69% from a year earlier to €2.8bn”, MSCI said.

Hotels were the only sector to register positive activity in the quarter, with transaction volumes growing by 20% from a year earlier to €4.5bn, on ”prospects of the post-pandemic recovery in tourism”.

There was also an improvement in certain national markets, notably in Scandinavia and the Netherlands. The Swedish market registered a 28% rise in investment activity since first-quarter 2023 to €2.1bn, to rank it in fourth place behind the UK, Germany and France respectively.

The Netherlands was Europe’s fifth largest market as a result of an 18% annual increase in investment activity to €2.1bn. 

Investment by country

Source: MSCI Real Assets

Investment volume - country summary

London was the top investment destination in Europe, attracting €4.6bn of deals, in spite of a 19% year-on-year decline from the first quarter of 2023. 

Leahy said: “When central banks start lowering interest rates, it will ease debt finance costs and bring buyers and sellers closer to agreeing a price at which they are prepared to transact. 

“This will certainly support a recovery in transaction volumes in the short term, however, the end of the forty year interest rate cycle in 2022 means owners of real estate cannot rely on the market to do their work for them. The emphasis through this next cycle will be on adding value through active asset management.” 

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