Investment activity in the UK and wider European markets have yet to show signs of bouncing back this year after falling in 2022, according to researchers from law firm CMS.
CMS’s latest European Real Estate Deal Point study showed total investment across the European real estate market fell by 14% year-on-year to €248bn (£212bn) in 2022.
In the UK, investment activity fell by 19% on the previous year. Other markets experiencing a decline included Germany, which was down by 16%.
By contrast, investment levels in Belgium surged by 177% year-on-year, while volumes in Spain were up by 29%. Italy was up by a quarter year-on-year.
Dr Volker Zerr, a partner in the real estate and public division at CMS in Germany and report co-author, noted that overall investment into real estate has continued to decrease in the first half of this year amid “clear reluctance” from investors, given the “constantly increasing interest rate environment”.
“So far, there are no indications of a trend reversal, so further development remains to be seen,” he said.
Offices market share grows
Residential and offices were the most popular asset classes in Europe during 2022, with each claiming a 24% share of the market. Offices grew its percentage share after a record low of 19% in the previous year.
The logistics sector’s share of the market fell to 18% last year, compared with a peak of 23% in 2021. Retail remained static at 16%.
Overseas investors accounted for a 54% majority of real estate investment, broadly stable on the previous year.
The proportion of transactions in which steps were taken to ensure the buyer met financial obligations remained at the record high level of 70%, similar to 2021.
CMS noted that buyers successfully negotiated favourable terms relating to contractual provisions on limitation periods more often than before.
Limitation periods of more than 24 months were often agreed in 2022, while there was a slight fall in the proportion of short limitation periods of up to 18 months.
Despite the buyer-friendly trends, researchers also observed a notable increase in seller-friendly clauses. The report showed de minimis and basket clauses were agreed significantly more often in 2022.
Some 52% of deals had a de minimis clause, while 42% had basket clauses. Those represented an 8% increase in de minimis clauses and a 10% increase in basket clauses in transactions carried out by CMS last year.
CMS said the number of transactions with agreements on limits to liability was particularly high in Eastern Europe, including de minimis clauses (70%), basket clauses (52%) and caps (75%) – a trend that has since driven segment growth in Europe more widely.
Bargain opportunities for buyers
Researchers noted that the markets rebounded from the Covid-19 pandemic in H1 2022, but the sharp increase in financing costs during H2 prompted cautious investment behaviour, leading to a decline in overall investment levels across the continent.
That decline was particularly pronounced in the fourth quarter, with investments plummeting by 57% to €47bn, compared with the same period in 2021.
CMS’s Zerr said: “The volatility in the European real estate investment market during 2022 emphasises the need for investors to remain vigilant and adaptable in the face of ever-changing economic conditions.
“The ongoing uncertainty in the market has nevertheless created a favourable environment for buyers, enabling them to negotiate high discounts when purchasing properties.”
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