Investment in commercial real estate (CRE) fell sharply in most EMEA markets in the first quarter, continuing the end-2022 trend, but investors are eyeing a rebound later in the year as uncertainty around financial and macroeconomic conditions potentially subsides, according to the latest EMEA capital markets snapshot by Colliers.
Bank crises in Europe and the US compounded existing concerns around high inflation, interest rate rises, weak growth and geopolitical risks, resulting in significant year-on-year declines in investment activity in major markets in Q1. Volumes fell in France and Spain by over a third compared to the first quarter of 2022 and sank even more in the UK and Italy. Germany meanwhile saw one of its weakest opening quarters in over a decade.
“Turmoil in the banking sector earlier this year dented already fragile investor confidence, particularly in London and other markets with a big financial footprint,” said Luke Dawson, Head of Global and EMEA Capital Markets, Colliers. “Countering this lull in confidence specific sectors in some markets continued to post strong performance, and assuming that inflation continues to fall and interest rates stabilise, we expect a revival of activity in the second half of 2023.”
“Transactions are still being held back by a gap in price expectations between buyers and sellers, but that is likely to close as more clarity emerges around market conditions and the cost of finance in the coming months,” said Damian Harrington, Head of Research, Global Capital Markets and EMEA, Colliers.
The current lull in investment extends to the wider EMEA region, with the United Arab Emirates also experiencing a pause in major transactions. Yet some big-ticket cross-border deals continued, such as the €448m purchase of the mixed-use St Katharine Docks development in London by Singapore’s City Developments Ltd (CDL).
Higher interest rates and environmental, social and governance (ESG) policies are also likely to act as catalysts for transactions in the months ahead. “Investment groups that took advantage of the very low interest rates that prevailed until recently will in some cases need to refinance at new, higher levels, while others will need to phase non-ESG compliant assets out of their portfolios”, added Harrington. “This will place pressure on them to divest assets, creating a significant opportunity for buyers - particularly all-equity ones.”
Big deals missing in Germany, even as macro outlook brightens
Major transactions were almost at a standstill in Germany’s seven largest cities in the first quarter, and this is likely to continue into Q2 as buyers and sellers wrangle over what constitutes fair pricing in the current environment. Although a recession is no longer forecast for Germany in 2023, Colliers does not anticipate a revival of investment activity until the final quarter.
London market battered by bank turmoil
Nerves around the banking sector were particularly strained in the UK in Q1, given the significance of the industry to London, easily the UK’s biggest commercial real estate market. Nonetheless, the Bank of England’s economic forecasts for 2023 are now more positive than they were at the end of last year, and a lack of quality space is supporting rents, leading Colliers to expect a return of investment momentum later in the second half. There are early positive signs of international capital being ready to re-commit to the market, with German and Chinese buyers making major acquisitions during the quarter.
ESG coming to the fore in Italy
Investment volumes in Italy fell to €910m in the first quarter from €3.3bn in Q1 2022, with yields pushed outwards by higher interest rates and mounting economic concerns. One clear trend noted by Colliers is the increasing importance of ESG certifications to investors in Italy, who view these as increasingly central to an asset’s long-term value as EU regulations continue to tighten.
Investors see value in offices, hotels in Spain
Despite declining year on year, investment volumes in Spain in the first quarter exceeded expectations, bolstered by two major residential deals. Sustained investor interest is also evident in Grade A, ESG-compliant offices in the business districts of Madrid and Barcelona, and in hospitality assets, supported by a tourism recovery and hotels’ strong operating results.
Signs of life amid Norway slump
While activity in the Norway market marked its lowest level for a first quarter since 2014, some significant deals were concluded that point to investor confidence in the longer-term outlook, including US investment fund Heitman’s acquisition of a student housing portfolio of some 1,500 rooms nationwide for €152m. Buyers remain eager to deploy capital overall but uncertainties over financing are hindering decision-making and execution.
Netherlands sees price corrections
In the Netherlands, price corrections are expected to continue into the second quarter of 2023. Bid-ask gaps remain and some of the largest pending transactions have been delayed. That said investors that are not reliant on external financing remain active, and vibrancy is likely to return to the market in the second half of the year, although some over-allocation towards real estate and continued economic uncertainty mean volumes are unlikely to surge.
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