European commercial real estate investment was little changed in the third quarter as recovery in the industrial sector and for the UK, Italian and Nordic markets was balanced out by the office sector’s continuing challenges, notably in Germany and France, according to MSCI’s latest quarterly Europe Capital Trends report.
The volume of completed transactions in July through September declined 2% from a year earlier to €39.2 bn, the report showed. This took transaction volumes to €130.9 bn in the first nine months, 1% down on activity registered for the same period a year earlier.
Tom Leahy, head of EMEA Real Assets Research at MSCI said: 'Stabilising valuations for most sectors and a pick-up in large deals are among the first green shoots of recovery to emerge after the shock of higher interest rates. It will take time for a revival in real estate investment to take root, however, and substantial gaps in buyers’ and sellers’ pricing expectations persist in some of Europe’s largest markets, which restricts market liquidity.'
He added: 'For the first time offices have been eclipsed by industrial as the top ranking sector for European property investment. That reflects the positive sentiment towards industrial properties as much as investor disaffection for a sector where the impact of hybrid working and obsolescence on occupier demand is a major concern.'
There are signs that the correction in capital values may be coming to an end. The MSCI Europe Quarterly Property Index showed that valuations were either stable or higher in the second quarter for more than 75% of the assets in the sample compared with the previous quarter. Central banks have also started to lower interest rates, which will also help to reduce pressure on property prices. Meanwhile, the hotel sector is also attracting institutional and private investment as tourism and business travel recover from the pandemic lockdowns.
Green shoots emerge
Because real estate typically takes months to transact, improving sentiment is not always immediately reflected in the headline figures for quarterly transactions. What emerges from the data, however, is a recovery in deals worth more than €250 mln. There were 26 of this size in the third quarter, or double the tally for the same period a year earlier.
Buyers deploying capital at scale are an important indication of a healthy market. Nevertheless, there remain some segments of the European market where there is still a chasm in the bid-ask spread in pricing, while economic and political concerns also weigh on investor sentiment. This is reflected in the high level of deals that are falling through or properties being placed on the market and then withdrawn.
