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Commercial real estate deals in Europe fell to a 13-year low in early 2024 as fading hopes of imminent interest rate cuts extended the slump in real estate markets.
Transaction volume in the first quarter was 34.5 billion euros, 26 percent below the already low level in the same period last year, the seventh consecutive quarter of declines, according to MSCI data published on Thursday. Fewer office buildings changed hands in a quarter than ever before.
The commercial real estate market has suffered a brutal adjustment to much higher interest rates, which have led to strong property values and increased financing costs in a market that relies heavily on debt to finance operations.
“After a very slow 2023, there were hopes that European real estate investment would pick up again in the first quarter of 2024,” said Tom Leahy, head of Emea Real Assets Research at MSCI.
“But the ongoing and sometimes painful adjustment to the end of historically low interest rates means the market remains a difficult place to transact.”
The report followed last week’s US data, which showed a 16 percent year-on-year decline in transaction volumes in the first quarter.
According to a study by Green Street, European office values have fallen by an average of around 37 percent since their peak in 2022. Prices for residential and commercial real estate have fallen by around a fifth.
Although some owners have been forced to sell due to debt pressures, many property owners are wary of booking losses at levels that they believe could be the bottom of the market.
Wealthy investors who can buy without debt have driven the majority of recent transactions – although they are generally limited to smaller deals.
According to MSCI, London is “by far” the number one investment city despite falling transaction volumes. A faster price correction in the UK compared to other parts of Europe has encouraged investors to return to the market in search of bargains.
Two high-profile office deals – the £240m sale of 20 Old Bailey and a £110m deal brokered by insolvency practitioners to sell 5 Churchill Place in Canary Wharf – collapsed during the quarter. However, this was interpreted by some market participants as a signal that sellers are hoping they can wait for better prices after the Bank of England cuts borrowing costs.
“Statistically speaking, the first quarter was pretty sad,” said Nick Braybrook, head of London capital markets at Knight Frank. “But actually it doesn’t reflect what’s going on out there. It feels very different.” He said private equity groups are starting to follow family offices into the market, which will lead to more deals in the next six months.
MSCI estimates that the prices sellers are willing to pay are often still lower than buyers would accept. “In many market segments, prices have not adjusted sufficiently to attract greater interest from buyers,” MSCI said.
Hotels were the only part of the market to see an increase in transactions. The sector experienced a boom in travel after the Corona crisis, which boosted business transactions.