With investment in the mainstay office sector continuing to suffer from a protracted stand-off between buyers and sellers over pricing, it was other parts of the commercial real estate (CRE) market that injected some energy into Q3, according to the latest (Q3-23) Capital Markets Snapshot for Europe by Colliers, a global leader in CRE services and investment management.
Continued slowdown for office investment.
Offices have seen their supremacy challenged in recent years by a surge of investor interest in other asset classes. The office market is continuing to suffer from sharply lower volumes in 2023 as it adjusts to Europe’s higher interest rate environment, and Q3 was no different, as the higher cost of financing and a stubborn bid-ask spread in major CRE markets persistently weighed on activity.
Student housing and light industrial among the brighter spots.
With offices in the doldrums, in Q3 it was student accommodation and long-lease transactions – mostly light industrial – that provided the bright spots, with some major deals in those spaces. Conversations at Expo Real in Munich in October also hinted that 2024 will see recovery, albeit not until the middle of the year as market players continue to strategise how to return to acquisitions.
“Everybody’s still expecting some movement out in yields across most sectors and until that bottoms out many investors are going to remain in a wait-and-see mode,” said Luke Dawson, Colliers’ Head of Global & EMEA Capital Markets.
“Looking to Q4, we expect any big activity to centre on entity-level deals, rather than traditional asset sales,” continued Dawson. “Refinancings, M&A, JVs, and sale and leasebacks; this is the area where we would look for upside in the market for the remainder of 2023.”
ESG investing shifts from rhetoric to reality.
Value-add investing, in which buyers acquire a property with a plan to renovate it, is now largely synonymous with ESG investing, another major topic at Expo Real, noted Damian Harrington, Colliers’ Head of Global & EMEA Capital Markets Research. “These ‘brown-to-green’ conversions have moved from a talking-point to a reality, as ever-tightening European regulations around the emissions of the built environment and high energy costs have created a market for upgrading older properties.”
“Investors are beginning to think about real-estate assets in new ways and are experimenting with innovative approaches to unlock value even as conventional deal-making remains weak due to the interest-rate environment,” said Harrington.
Student housing deal biggest in the UK in Q3.
A £500 million forward-funding deal for student housing was the standout transaction in the UK over the quarter, as Cain International moved to support the creation of 2,389 beds in purpose-build student accommodation in major university cities in England. More generally, UK CRE investment volumes this year are likely to come in at a decade-long low, although the Bank of England’s decision to hold rates at its September meeting raised hopes that the financing picture will stabilise, supporting an eventual increase in market activity.
Office deal drought continues in Germany.
At around €7 billion, Germany saw an increase in volumes in Q3 compared to the previous two quarters, driven by food-anchored retail warehouses and logistics assets, but major office transactions were thin on the ground. This may change in the coming months, however, as mounting refinancing requirements for real estate assets motivate sellers to reconsider asking prices.
Buyers and sellers remain far apart in the Netherlands.
Although transaction volumes stabilized in Q3 in line with the previous two quarters, volumes in the Netherlands were down by around 70% year on year. The Dutch residential market remains in flux due to uncertainty around regulations and rent caps, while retail has been hit by multiple bankruptcies. Meanwhile offices continue to suffer from a wide gap between the expectations of buyers and sellers, with one newly developed office building in central Amsterdam being taken off-market because bids did not meet sellers’ expectations.
Hotels again the star in Spain.
As was the case in the previous quarter, hotels provided the highlights in Spain in Q3, accounting for 35% of total volume. Student housing was another outperformer, but more generally Spain saw a slowdown in activity year on year. However, Colliers expects prices to bottom out over the next two quarters, as central banks end their series of interest rate rises and stability returns to the market.