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.

The volume of completed transactions fell 37% to €53bn in the third quarter from a year earlier, with all the major real estate sectors and markets registering declines. The number of properties sold during the quarter was the lowest since August 2020, while the number of parties completing deals fell to a nine-year low.

Tom Leahy, head of EMEA real assets research at MSCI, said: “We are now seeing the impact of the inflation-induced economic slowdown starting to be reflected in the real estate investment market. Price expectations are adjusting to higher borrowing costs and the prospects for rents.

“History tells us this recalibration will likely weigh on investment activity, as is apparent in the current slowdown and the volume of pending deals at the end of September, which was the lowest by value since 2013.”

Nine of the 10 largest national markets registered declining transaction volumes during the third quarter, led by the UK, Germany and France. The exception was fifth-placed Spain, where PGGM’s €900mn purchase of a large student portfolio boosted the market’s deal flow value.

Germany was the first major European market to slow this year, reflecting the anticipated economic impact of its exposure to Russian energy supplies. German transaction volumes were down 24% in the first nine months, led by the office and residential apartment sectors.

Europe-wide purchases of industrial, office and retail properties declined in the third quarter. Industrial assets held up best, with overall sales volumes well above the average for the preceding five years. The strength of occupier demand – evidenced by MSCI’s data showing rental growth and low vacancy rates – has supported the sector.

“The impact of the war in Ukraine and of the resultant higher energy costs, rising interest rates and faltering economic growth has started to impact the European property market in a meaningful way. The outlook for real estate investment has deteriorated over the course of the year, but the lag time between world events and the direct property market means that the slowdown has become increasingly evident in the third quarter,” MSCI said in its report.

Data for the first nine months of 2022 show that in such an uncertain investment environment cross-border investors have favoured the largest and most liquid markets. This benefited London and Paris, which registered 17% and 11% increases in investment volumes, respectively, for the period.

Another trend evident in the London office market has been the growing and sizeable price premium commanded by buildings with good environmental ratings.

“The property industry has changed in the last three-to-four years, with occupiers and owners acknowledging the urgent need to mitigate real estate’s contribution to climate change,” according to MSCI’s research.

“This shift has meant an emphasis on buildings that either already meet, or have the capacity to meet, ambitious carbon-reduction targets. This preference is increasingly evident in the aggregate pricing data. A hedonic analysis of London office prices, which controls for factors that impact building value such as age, size and submarket location, shows a sizeable and growing premium for assets which have environmental ratings from the likes of BREEAM and LEED.”

Leahy added: “There’s a growing body of evidence of falling prices in Europe. Our UK Monthly All-Property Index in September showed the fastest fall in capital values since mid-2016. Adding to the uncertain investment environment are the pressures high interest rates are placing on borrowers refinancing mortgages.”

In the UK, investment volumes were down 33% in the third quarter from a year earlier to €13.4bn, a two-year low led by a slowdown in office transactions. Despite this, the UK overtook Germany as Europe’s largest commercial real estate investment market.

MSCI found that the UK industrial sector was bucking the otherwise gloomy trend. Occupier demand for UK industrial assets remained strong, according to its data, with annual rental growth at a 32-year high, combined with low vacancy rates

In Germany, investment volumes dropped by 36% in the third quarter to €11.7bn, led by a slowdown in apartment and office transactions, notably by domestic investors. Germany was the first major European market to slow because of the economic impact of its exposure to Russian energy supplies.

The French real estate market also suffered, with investment volumes falling 34% in the third quarter to €5.2bn.

Sweden was Europe’s worst-performing major market in the third quarter, suffering the largest decline in investment volumes – a 77% fall to €2.2bn – as domestic investors shied away from investing.

The Netherlands was the next worst-performing market, with transaction volumes declining by 52% in the third quarter to €3.1bn, led by a slowdown in investment in residential properties.

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