Investors are turning to strategic joint ventures and sale-and-leaseback opportunities as pricing uncertainty and tighter financial conditions continue to dampen trade in European markets.
In its latest EMEA market snapshot covering Q2, Colliers says confidence over asset pricing has yet to return to the European region in earnest, as high inflation persists in many countries, prompting further central bank interest rate rises.
Luke Dawson, head of global and EMEA capital markets, said that against this backdrop, ‘deal-making continues to suffer as buyers and sellers differ over asset valuations, as reflected in continued bid-ask spreads’.
He explained: ‘Many investors remain reluctant to place major portfolios and assets on the market when limited buyer appetite and financing constraints make their desired prices challenging to achieve. At the moment, the sweet spot for transactions seems to be between €20-€60 mln.’
Colliers does not anticipate any upswing in overall activity until Q4 at the earliest, when interest rates are expected to have peaked.
In the meantime, investors are exploring various structures to optimise their exposure to markets.
Said Dawson: ‘Many of the investors we are speaking to are looking for a development partner, certainly in the industrial and logistics space.’
He added: ‘Equally, joint-venture structures have become more prevalent as investors look for a growth platform without having to set up their own asset management team.’
Sector trends
In terms of sectors, Industrial and logistics (I&L) stood out in an otherwise weak quarter for EMEA. Colliers noted that I&L pricing has adjusted more quickly to the turbulent macroeconomic picture, with rental growth encouraging more transactions. Yet owners are still hesitant to place core logistics assets on the market amid adverse conditions.
In the office sector, activity was subdued, although some benchmark deals completed such as hospitality giant Accor’s sale of its global headquarters in Paris to the Valesco Group for €460 mln.
Investors are also looking to upgrade office properties to core in a value-add play. ‘Investors are now looking for some form of downside protection on offices, meaning that they want to be able to add value to the properties themselves through sustainability upgrades that meet new workplace and energy/emissions demands,’ noted Damian Harrington, head of research, global and EMEA capital markets.
Market highlights
Colliers expects the current market weakness in Germany, which recorded Q2 investment volumes of around €5 bn, to last through the end of the year.
Volumes for the first half of 2023 were less than half of the 10-year average, and the firm does not predict any significant improvement in the second half of 2023 due to high financing costs and the impact these have on the burden of rolling over expiring debt.
In Spain, the post-pandemic tourism upswing is aiding the hospitality sector, with hotels accounting for 36% of total investment volume over Q2. This, said Colliers, was a bright spot in an otherwise slow quarter, with market decision-making impacted not only by a shifting interest rate environment but also uncertainties related to Spain’s general election.
Since peaking in November 2021, Sweden’s listed property sector has fallen by more than 50% and was trading at a near-50% discount to net asset value by the end of Q2.
Listed companies are therefore clearly now on the sell-side, but there are buyers too, including a new market entrant in the shape of pension fund AP7. Transaction activity may see a gradual recovery in Q3, but there remains a gap between buyer and seller pricing expectations.
In the UK, higher-than-expected inflation in Q2 led to further debate over where interest rates could settle, causing a drag on deal-making.
At around £6 bn (€7 bn), volumes were down by over 60% on the same quarter of last year. Colliers said buyer attention has shifted noticeably towards value-add opportunities, whereas the market for core assets remains sluggish due to wide bid/ask spreads.
