European investment lowest since 2010 – no sector spared

European commercial real estate investment fell to its lowest transaction volume since 2010 in Q2 2023, the fourth quarter of falling deal volumes in succession according to MSCI Real Assets in its latest Europe Capital Trends report.

Rising interest rates, sluggish economic growth and structural changes in office use, all took their toll.

Quarterly investment volume by deal type

The volume of completed transactions fell 58% from a year earlier to €34.4 billion in the April to June period.

No sector or major national market was spared. It was the weakest quarter for office trading in Europe since MSCI’s records began in 2007. However, the office investment volume transacted was only fourth worst because average prices have increased, offsetting some of the decline. Office sales totalled €8.3 billion during the quarter, 68% less than a year earlier.

MSCI observed that the gap is growing between best-in-class office assets and the rest.  There is also a gap between sellers’ price expectations and what buyers are willing to pay. “This will most likely continue until investors gain more visibility on borrowing costs and the health of the occupier market,” MSCI’s head of EMEA real assets research Tom Leahy said.

Tom Leahy.

There was a substantial slowdown in investment in the apartment and industrial property segments too. In the industrial sector, the €7.3 billion of transactions was 55% below the levels of second quarter 2022.

The fall in apartment investment which declined 54% to €7.2 billion, was due to a retrenchment in demand in Germany, theUK, the Netherlands and the Nordics, MSCI said. German apartment acquisitions fell to their lowest level since 2010.

Germany remains Europe’s largest apartment market but several listed players are now looking to sell assets in order to deleverage.

Hotels were the least badly affected sector, with a 16% decline in deals in the first half from a year earlier to €5.9 billion.

The UK remained Europe’s largest commercial real estate market with €21.1 billion of investment activity in the first half of 2023.

Meanwhile, the slightly stronger second quarter was not enough to offset the marked deterioration in dealmaking in Germany, where the market has slowed more than any other major investment destination in Europe: Hi 2023 investment volumes were down 56% on the fiveyear average.

Paris has retained its status as Europe’s top investment destination owing to four large property deals in the first half. Notable transactions in the second quarter were LVMH’s purchase of its Champs-Elysees store, reportedly for €770 million, and Valesco Group’s acquisition of Tour Sequana in the suburb of Issy-les-Moulineaux in a €460 million sale-and-leaseback deal with AccorInvest.    

“Prospects for the remainder of the year hinge on how far central banks raise interest rates to quell persistent inflation,” said Leahy. “Once there is clarity on borrowing costs, the uncertainty over pricing should ease and deal volumes may in due course start to pick up. Asset sales by German and Swedish listed residential companies to deleverage their balance sheets highlight how, in time, owners under pressure to sell will help set a floor on valuations and pricing.”