European CRE at an All-Time Low

The commercial property market in the continent has suffered as a result of higher interest rates

European commercial real estate deal making fell to a 13-year low at the start of 2024, as fading hopes of imminent interest rate cuts prolonged the slump in property markets. Transaction volumes of €34.5 billion in the first quarter were 26% lower than the already depressed levels in the same period last year, the seventh successive quarter of declines, according to data from MSCI released recently. Fewer office buildings changed hands than in any quarter on record.

The commercial property market has suffered a brutal adjustment to much higher interest rates, which have slammed property values and increased financing costs in a market that relies heavily on debt to fund deals. “After a very slow 2023, there were hopes that European property investment would start to pick up in the first quarter of 2024,” said Tom Leahy, Head of EMEA Real Assets Research at MSCI. “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.”

The report followed last week’s US data showing a 16% decline in deal volumes in the first quarter from a year earlier. European office values have sunk about 37% on average from their peak in 2022, according to Green Street research. Residential and industrial property prices are down by about a fifth. 

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 readjustment to the end of historically low interest rates means the market remains a difficult place in which to transact.

Tom Leahy, Head of EMEA Real Assets Research at MSCI

Although some owners have been forced to sell by debt pressures, many property owners are reluctant to crystallise losses at what they believe could be the bottom of the market. High net worth investors who can buy without debt have powered the bulk of recent transactions — although they are generally limited to smaller deals. 

London was “by far” the number one city for investment, MSCI said, despite transaction volumes falling. A faster correction in prices in the UK, relative to elsewhere in Europe, has encouraged investors to return to the real estate market in search of bargains. 

Two high-profile office deals — the £240 million sale of 20 Old Bailey and a £110 million deal brokered by receivers to sell 5 Churchill Place in Canary Wharf — collapsed during the quarter. However, this has been read by some in the market as a signal that sellers are hopeful that they can wait for better prices after the Bank of England lowers borrowing costs. 

“Statistically the first quarter was pretty woeful,” said Nick Braybrook, head of London capital markets at Knight Frank. “But actually, it is not reflective of what is going on out there. It feels pretty different.” He said private equity groups are starting to follow family offices into the market, which will result in more deals over the next six months.

MSCI estimated the prices sellers are willing to pay are still often lower than those buyers would accept. “Many segments of the market have not been repriced sufficiently to bring greater interest from buyers,” MSCI said. 

Hotels were the only part of the market to see a rise in transactions. The sector has enjoyed a post-Covid resurgence in travel that has boosted dealmaking.