European commercial real estate investment fell for the seventh consecutive quarter in the first three months of 2024, according to the latest Europe Capital Trends report from MSCI Real Assets.
The research concluded that many buyers and sellers have remained unwilling to transact given the uncertainties over pricing.
The volume of completed transactions in the first quarter declined 26% from a year earlier to €34.5 bn, the lowest level since 2011, the quarterly report showed.
Interest rates issue
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.
Tom Leahy, 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.'
Price expectations gap
MSCI Price Expectations Gap data highlight the extent to which owners of properties in many core parts of Europe’s market would need to lower asking prices to complete a sale.
Anecdotal evidence supports these findings: for example, there is a -20% gap between asking prices for London office properties and the prices realised in completed sales.
The prevailing uncertainty over pricing is reflected in the number of transactions terminated before completion or for-sale properties withdrawn from the market.
The count rose during the first quarter to the highest since the Global Financial Crisis (GFC), underscoring the difficulties in completing property sales. Furthermore, the fewest number of companies were buying and selling commercial buildings in Europe in the first quarter since 2012.
Offices struggling
A breakdown of the data confirmed the continued weakness of office markets, Europe’s largest real estate sector, with transaction volumes declining 45% year-on-year to €7.6 bn.
Office landlords are contending with the impact of hybrid working on occupier demand while the need to provide sustainable work environments has rendered many older buildings obsolete, unless there is investment in remedial works.
The quarterly figures showed sales activity 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 €2.8 bn.
Hotels were the only sector to register positive activity in the quarter, with transaction volumes growing by 20% from a year earlier to €4.5 bn, on prospects of the post-pandemic recovery in tourism.
Archer Hotel Capital’s €260 mln purchase of The Shelbourne Hotel in Dublin and CDL’s €244 mln acquisition of the Hilton Opera Saint Lazare in Paris featured among Europe’s six largest single property transactions in the first quarter.
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 €2.1 bn, to rank it in fourth place behind the U.K., Germany and France respectively. The Netherlands was Europe’s fifth largest market as a result of a 18% annual increase in investment activity to €2.1 bn.
Distress ahead
The number of property sales arising from distressed situations is growing. The rapid increase in borrowing costs and falling property values have posed challenges at an asset as well as a corporate level to those property owners and developers with high levels of indebtedness.
This is notably the case in Germany, where transaction volumes over the 12 months to March 31 have slumped 75% from the pre-crisis peak.
Tom Leahy concluded: '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.'
European highlights
UK investment volumes fell 11% in the first quarter from a year earlier to €11.8 bn. The UK was the most Europe’s most active investment market for commercial real estate, registering double the volumes of next-placed Germany and quadruple the investment in third-ranked France.
London was the top investment destination in Europe, attracting €4.6 bn of deals, in spite of a 19% year-on-year decline from the first quarter of 2022. The first-quarter 2024 was the fifth worst quarter on record for office sales in London.
The Irish market registered a 28% fall in investment to €727 mln to rank Ireland in 10th place among Europe’s most active national markets. Dublin had a 16% drop in transaction volumes in the first quarter to €621 mln, a decline limited by Kennedy Wilson’s sale of The Shelbourne Hotel to Archer Hotel Capital.
Germany remained Europe’s second-largest market after the UK with €5 bn of completed real estate transactions, a 32% decline from a year earlier.
Office prices in German A cities have declined 30% over the past two years, however the MSCI Price Expectations Gap model indicates that sale prices need to fall further to revive transactions.
In France, investment volumes collapsed by 69% from a year earlier to €2.8 bn to place France in third place for Europe’s top national markets after the UK and Germany respectively.
Eight office properties in Paris sold for a combined total of less than €500 mln, making it the worst quarter on record for Parisian office sales.
The collapse in office property sales caused transaction volumes in Paris to slump by 77% from a year earlier to €1.5 bn. Office prices in Paris have fallen by 14% since their pre-inflation peak but there is still a wide price expectations gap.
