Uncertainty over pricing has led to a seventh consecutive fall in real estate investment across Europe, according to the latest Europe Capital Trends report from MSCI Real Assets.
The volume of completed transactions in the first quarter of 2024 declined by 26% from a year earlier to €34.5bn (£29.6bn), the lowest level since 2011.
Tom Leahy, head of EMEA real assets research at MSCI, said: “After a very slow 2023, there were hopes that European property investment would start to pick up in the first quarter of 2024, but the continued and sometimes painful readjustment to the end of historically low interest rates means the market remains a difficult place in which to transact.
“Buyer and seller price expectations have diverged and until interest rates start to come back down or the growth prospects for European economies improve markedly, the price gap is likely to remain in place.”
Expectations that the European Central Bank might start to cut interest rates in the spring proved too optimistic, said MSCI, as five-year swap rates continued to move out through the first three months of the year, impacting debt costs for commercial real estate.
This, plus a failure of pricing in many market segments not fully adjusted to reflect the higher interest rate environment and subdued economic growth, has deterred prospective buyers and persuaded many property owners to delay sales to avoid crystallising potential losses.
MSCI price expectations gap data shows that there is a -20% gap between asking prices for London office properties and the prices realised in completed sales.
“When central banks start lowering interest rates, it will ease debt finance costs and bring buyers and sellers closer to agreeing a price at which they are prepared to transact, said Leahy. “This will certainly support a recovery in transaction volumes in the short term, however, the end of the forty year interest rate cycle in 2022 means owners of real estate cannot rely on the market to do their work for them. The emphasis through this next cycle will be on adding value through active asset management.”
In the offices sector, transaction volumes fell by 45% in Q1 to €7.6bn. The quarterly figures showed sales activity in the major office markets of London, Paris and Germany had dipped to the lowest since the GFC.
Hotels were the only sector to register positive activity in the quarter, with transaction volumes growing by 20% from a year earlier to €4.5bn.
There was also an improvement in certain national markets, notably in Scandinavia and the Netherlands. The Swedish market registered a 28% rise in investment activity since first-quarter 2023 to €2.1bn, to rank it in fourth place behind the UK, Germany and France respectively.
The Netherlands was Europe’s fifth largest market as a result of a 18% annual increase in investment activity to €2.1bn.
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