Living, light industrial provide bright spots in European real estate - research

Commercial real estate market sentiment across Europe remains subdued but some investment bright spots remain, according to new research from Colliers.

Investment volumes remain low across the region as the cost of debt remains high, while sectos like the office continue to look weak, the report said. ESG upgrades remain a central challenge.

However, alternative investments such as student housing (UK and Spain) continue to attract attention, and segments such as light industrial also provide respite.

Office struggles
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 market that injected some energy into Q3, according to the latest (Q3-23) Capital Markets Snapshot for Europe by Colliers.

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.

Meanwhile, ever more stringent ESG legislation is here to stay. Value-add investing, in which buyers acquire a property with a plan to renovate it, is now largely synonymous with ESG investing, 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,' Harrington said.

Student housing and light industrial
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. 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,' Dawson added.

A £500 mln (€572 mln) 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 property 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.

Meanwhile, 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.


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