European transaction activity hit an 11-year low in the first quarter of 2023 due to the mismatch in pricing expectations between buyers and sellers, according to MSCI Real Assets’ latest Capital Trends Europe report. Overall commercial property deal volume in the region was down 62 percent year-on-year, with the €36.5 billion total representing the lowest quarterly volume since Q2 2012.
The three largest markets of the UK, France and Germany all recorded significant declines in sales volume compared with Q1 2022. The same was true for all major property sectors except for hotels, which were flat. Industrial, for which prices fell the most of any sector in Europe, saw the biggest proportional decline in transaction volume at 76 percent. This was particularly apparent in the UK, where industrial volumes fell 77 percent year-on-year to just €1.4 billion.
Historic low for office
With businesses still coming to terms with the future of the workplace, however, it was office that yielded the starkest figures for the quarter. The report reveals the number of offices sold in Q1 2023 was at its lowest level in history, crystalizing the bifurcation in the sector whereby only the highest-quality assets are trading. Its previous nadir was Q3 2009. Investment volume for European office was also down 64 percent on Q1 2022, a 13-year low.
The average price paid for a CBD office asset in Western Europe spiked in the first quarter of the year, at €12,700 per square meter. Tom Leahy, head of EMEA real assets research at MSCI, says this reflects a clear distinction in the quality of offices traded. “That divide has opened up. There’s a bigger gap between the better-quality assets and the lower-quality ones,” he tells PERE.
Of all European real estate market segments, MSCI data shows French office and UK office were the top two for transaction volume in first quarter. “The French market has held up better in aggregate than the UK. It hasn’t seen the same scale of slowdown and prices haven’t fallen as far,” says Leahy.
Looking more closely at prices in the two largest and most liquid office markets in the quarter, Paris and London, respectively, the report also shows a clear price premium for properties with energy efficiency ratings such as BREEAM, LEED and HQE. “If you look at where the divide is opening up, it’s not necessarily that there’s huge price growth for the buildings that have green ratings, it’s that there’s a bigger discount for the buildings that don’t,” explains Leahy.
This ‘green premium’ has been increasing sharply since 2022 in London, but has since flatlined in Paris. “Maybe buyers in London are more aggressively discounting the lower-quality buildings than in Paris,” he posits.
The report also points out that buildings with environmental ratings are still a minority of total office trade volume in Europe, however. This is true of both CBD and suburban office.
Changing of the guard
There are other bright spots in the data, however, particularly in the Spanish market, which was down only 13 percent compared with Q1 2022. Leahy notes: “The market seems to have held up quite well on the back of investment in the Spanish living sector.” Indeed, the report shows Madrid was the third-largest market for sales in Q1, displacing both Berlin and Stockholm from their 2022 positions with the help of several large residential acquisitions. In addition, Barcelona was the only market in the top 10 to record an overall increase in transaction volume, buoyed by hotel investment as tourism continues to recover post-pandemic.
Investment in Germany, by contrast, declined by 71 percent year-on-year. “Having been the market at the top of the tree in Europe immediately after the pandemic, that surprised me a little bit on the downside,” says Leahy.
As European markets continue to struggle with price discovery, the level of pending transactions in the region is low as of the end of Q1, says Leahy. This suggests a slow recovery in transaction activity moving forwards.