The volume of European commercial real estate investment transactions declined in the third quarter as the uncertain economic outlook and rising interest rates persuaded more investors to wait for greater visibility on property pricing, according to the latest Europe Capital Trends report from MSCI Real Assets, a part of MSCI.
The volume of completed transactions fell 37% to €53.0 bn 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 U.K., Germany and France. The exception was fifth-placed Spain, where PGGM’s €900 mln 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 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.
Data for the first nine months of 2022 show that in such an uncertain investment environment cross-border investors have favored the largest and most liquid markets. This benefitted London and Paris, which registered 17% and 11% increases in investment volumes, respectively, for this period. Another trend evident in the London office market has been the growing and sizeable price premium commanded by buildings with good environmental ratings, such as those compiled by BREEAM and LEED.
Tom Leahy concluded: ‘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.’
