Did you know that the European real estate market has endured a seventh consecutive quarter of value declines? Despite this challenging landscape, the sector is poised for a potential rebound, as the sharp rally in European listed real estate investment trusts (REITs) during the latter part of 2023 suggests that negative pressures on direct real estate values are easing. As the European economic outlook grapples with recession-like conditions, a slow recovery is expected in 2024, with inflation projected to return to target in the second half of the year and the European Central Bank likely to cut interest rates.
The European property market has faced a long period, with the eurozone experiencing contraction in economic growth during the fourth quarter of 2023. However, there are glimmers of hope on the horizon, as the residential properties in Europe and key sectors like office, retail, and logistics have shown resilience, showcasing the potential for real estate investment in Europe.
Key Takeaways
- The European real estate market has seen a seventh consecutive quarter of value declines, but there are signs that values will begin to stabilize as 2024 progresses.
- The European economic outlook suggests that the region is experiencing recession-like conditions, with a slow recovery expected in 2024.
- The sharp rally in European listed real estate investment trusts (REITs) during the latter part of 2023 indicates that negative pressures on direct real estate values are easing.
- The commercial real estate in Europe sector has shown resilience, with strong rental growth in office, logistics, and residential markets.
Eurozone Real Estate Market Overview
The European real estate market has navigated a challenging period, with the European real estate market entering a seventh quarter of decline in the fourth quarter of 2023. Values fell a further 3.5% over the three-month period, and the average peak-to-trough decline is now 17%. However, there are signs that real estate values will begin to stabilize as 2024 progresses.
Value Declines and Valuation Lags
Despite the value declines, valuations still lag market pricing by around 8%. This suggests that the market has potentially overshot on the downside, and there is an opportunity for a correction as the year progresses.
REIT Performance and Market Sentiment
The sharp 25% rally in European-listed REIT performance during November and December 2023 cooled off in early 2024, but the rebound indicates that negative pressures on direct real estate values are easing. This improvement in market sentiment is a positive signal for the European real estate market going forward.
Yield Spreads and Relative Value
Weighted average European prime real estate yields have increased from 4.3% in June 2022 to 5.4% in December 2023, and the spread between prime real estate yields and government bond yields is now 260 basis points. This suggests that core real estate is moving back to a position of relative value compared to other asset classes.
Operational Performance Highlights
In the office market, prime rents increased by 8% in 2023, demonstrating the continued demand for well-located and energy-efficient workspaces. Similarly, the logistics market experienced a 7% rise in prime rents, highlighting the resilience of this sector amidst the broader economic climate.
Turning to the retail sector, real estate investment trusts (REITs) have been reporting healthy like-for-like rental growth, defying the challenges posed by the cost-of-living crisis and maintaining a strong footing in the market.
The residential market has also exhibited resilient fundamentals, with vacancy rates across the top 30 European cities estimated to be just 3%, down from a peak of 4% in 2021. Furthermore, open-market European residential rents are projected to grow at a steady 3% per annum over the coming years, underscoring the continued appeal and stability of this sector.
Office Market Trends
The European office market continues to navigate a dynamic environment, with rising vacancy rates and signs of structural oversupply. European office vacancy rates are rising steadily, up by 10 basis points to 8.5% in the fourth quarter of 2023, still just short of the long-term average. A combination of weaker economic fundamentals and structural oversupply, resulting from hybrid working, is biting.
Vacancy Rates and Structural Oversupply
Competition from occupiers consolidating into well-located and energy-efficient buildings means the prime end of the European office market remains undersupplied, with headline rents rising 8% over the year to the fourth quarter of 2023.
Rent Growth and Investment Activity
However, investment in offices dropped sharply to represent just 26% of total investment in the fourth quarter of 2023, the lowest office investment share on record, as investors are reducing office allocations.
Yield Expansion
Prime net initial office yields increased by 90 basis points over the year to the fourth quarter of 2023, to a weighted average of 5%, reflecting the rising office vacancy rates and cautious investor sentiment.
|
Metric |
Q4 2023 |
Change YoY |
|
European Office Vacancy Rates |
8.5% |
+10 bps |
|
Prime Office Rent Growth |
8% |
N/A |
|
Office Investment Share |
26% |
– |
|
Prime Office Yields |
5% |
+90 bps |
This data suggests that the European logistics market has begun to stabilize after a sharp post-pandemic slowdown.
Tenants are still taking a cautious approach to signing new leases, but the latest available take-up data for the third quarter fell by only 9% year-on-year, a notable improvement from the 32% drop in the second quarter. Vacancy rates remain low at around 5%, and the availability of best-in-class warehouses is scarce. Completions are expected to fall to 4% of stock this year.
Conclusion
The European real estate market is navigating a challenging period, with recession-like conditions persisting and a slow recovery expected in 2024. However, there are signs that values will begin to stabilize as the year progresses, and the relative attractiveness of real estate is improving as yields rise and interest rates potentially start to fall. Operationally, the real estate sectors have shown resilience, with strong rental growth in office, logistics, and residential markets.
While debt refinancing challenges remain, most borrowers have been successful in managing their loan maturities so far. For investors with equity to deploy, both opportunistic and core strategies in the European real estate market could present compelling investment prospects in the coming months. The European real estate outlook suggests a cautiously optimistic sentiment, with potential real estate investment opportunities emerging as the market navigates the current economic landscape.
By carefully evaluating the market trends and fundamentals, investors can position themselves to benefit from the European real estate outlook and the resilience demonstrated by the various real estate sectors. Talk to an expert today!
