By Virginie Wallut, Director of Real Estate Research and Sustainable Investment at La Française Real Estate Managers
The European commercial real estate market hit pause in Q1 2023. Tightening monetary policy, rising inflation and European and US bank crises weighed heavily on investment activity. While the current context is slowing down the pace of transactions and pushing some investors to adopt a wait-and-see attitude, it is also creating opportunities for equity-rich investors, who can create value through renta reversion or by improving the features – particularly the environmental characteristics – of assets and
for opportunistic global investors.
Market segments characterized by a structural supply shortage or more immune to economic cycles are attracting investors’ attention. These include healthcare, tourism and manages residential assets.
Investment volume down year-on-year
The European real estate market is experiencing a period of adjustment. Investors, eager to position themselves in the new macroeconomic and financial context, are necessarily trying to establish new benchmarks. In Europe, the volume of commercial real estate investment dropped 63% year-on-year, reaching 26.5€ in Q1 2023. In Q1 2023, the share of global investors (versus European investors), looking to take advantage of price levels, was on the rise.
Across the board, all asset classes and markets registered declining investment volumes. Nevertheless, diversification assets stood out, given their more defensive profile. For example, the volume of European healthcare real estate investment over the past twelve months ending March 2023 declined, standing at €9.5 billion, nevertheless above its long-term average. The United Kingdom and Germany remain the most dynamic European real estate markets despite the respective drops in investment volume of 68% and 71% year-on-year. Ireland, Belgium and France on the other hand are the most resilient, registering declines of less than 30%.
Broadly stable prime office yields
The upward trend in peripheral location real estate yields continued within a range of 25 to 50 basis points across Europe in Q1, while prime office yields remained broadly stable. Paris, London, and the main German cities (Berlin, Hamburg, Munich and Frankfurt) still offer prime yields below 4%, while regional cities (i.e., Lille) offer yields of around 4.5%. High inflation and growth in rental values, supported by weak vacancy in central locations, should contribute to offsetting the effect of rising interest rates on prime real estate asset values.