MSCI: Q1 CRE investment in Europe slumps to 11-year low

European commercial real estate investment slumped to an 11-year low in Q1 this year as uncertainty over valuations and higher financing costs weighed on sentiment, according to the latest Europe Capital Trends from MSCI Real Assets, which was published yesterday.

The volume of completed transactions fell 62% from a year earlier to €36.5 billion 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 billion of transactions was the lowest in 13 years. 

“The office sector has 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,” said Tom Leahy, head of EMEA real assets research, MSCI.  “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 industrial sector had the quarter’s sharpest annual drop in investment sales among the major property types, with €5.4 billion of transactions, representing a 76% decline. This was a significant reversal of fortune for a sector which had attracted strong investment flows and price gains in recent years, MSCI said.

The UK remained Europe’s largest commercial real estate market with  €11.3 billion of investment activity, a 59% decline from a year earlier. France came second, but investment volumes declined 40% in Q1 to €6.9 billion. Despite the decline, France moved ahead of Germany into second place behind the UK in the ranking of Europe’s top national investment markets. Paris overtook London to become Europe’s top investment destination thanks to the three largest single property sales of the quarter.

These were luxury retailer Kering’s €860 million purchase of 35-37 avenue Montaigne and the €836 million forward purchase of a new headquarters in the 13th arrondissement by Groupe AFD, the French government’s overseas development agency. The third largest was Dubai Holding’s €650 million acquisition of the Westin Paris Vendome hotel. Overall transaction volumes in Paris were unchanged from a year earlier at €5.3 billion.

In Germany, investment volumes declined by 71% to €5.1 billion, the weakest level of activity since 2010. While almost every European country had falling transaction volumes, Spain fared less badly due to local property sector trends, with an annual decline of 13%. Barcelona was the only top 10 European city to enjoy investment growth, largely the result of the €180 million sale of the Hotel Sofia to Axa. Madrid also pushed Berlin into fourth place in the rankings of top investment destinations in Europe.

In the Netherlands, volumes declined 73% in the first quarter to €1.5 billion, placing the Dutch market in fifth place in Europe. Transactions in Amsterdam declined by 78% to €309 million.

“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,” said Leahy. “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.”