European commercial real estate investment slumped to an 11-year low in the first quarter of 2023, led by the office sector as uncertainty over pricing and the higher costs of mortgage finance weighed on sentiment, according to the latest Europe Capital Trends report from MSCI Real Assets, a part of MSCI.
The volume of completed transactions fell 62% from a year earlier to €36.5 bn in January through March with most of the major real estate sectors and national markets down, the report showed. Offices, Europe’s largest real estate sector, had the fewest number of properties sold on record in the quarter and the €10.8 bn of transactions was the lowest in 13 years.
Tom Leahy, head of EMEA Real Assets Research at MSCI, said: ‘The disparity in pricing expectations for buyers and sellers has widened since the second half of last year as appraisal values continue to adjust to the rapid rise in interest rates and on concerns over the muted economic outlook. The office sector has also been particularly hard hit as changing occupier needs, such as the switch to hybrid working and a focus on energy efficiency, means a bias towards better quality assets has emerged.’
The industrial sector had the quarter’s sharpest annual drop in investment sales among the major property types, with €5.4 bn of transactions. The 76% decline was a significant reversal of fortune for a sector which had attracted strong investment flows and price gains after the Covid-19 pandemic highlighted its importance to supply chains and e-commerce.
The U.K. remained Europe’s largest commercial real estate market with €11.3 bn of investment activity, a 59% decline from a year earlier. France, Germany, Spain and the Netherlands ranked next in the top five markets, in order of size. While almost every European country had falling transaction volumes, France and Spain notably fared less badly due to local property sector trends, with annual declines of 40% and 13%, respectively.
Paris overtook London to become Europe’s top investment destination thanks to the three largest single property sales of the quarter. These included luxury retailer Kering’s €860 mln purchase of 35-37 avenue Montaigne and the €836 mln forward purchase of a new headquarters in the 13th arrondissement by Groupe AFD, the French government’s overseas development agency. Overall transaction volumes in Paris were unchanged from a year earlier at €5.3 bn.
Tom Leahy concluded: ‘While there are obvious concerns about the availability of real estate finance following the banking turmoil in March, we’ve yet to see a widespread increase in distressed sales. For the market this is limiting scope for any dramatic shifts in transaction pricing. Anecdotally, lenders appear to be accommodating in the current environment and it’s worth remembering that after the Global Financial Crisis it was several years before we saw meaningful volumes of distressed sales.’
