Chapter 2
Capital Markets
European Real Estate Market Outlook 2024
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Investment activity is expected to pick up in the second half of 2024 as clarity on new price levels supports activity. Improved capital market conditions and loan maturities will create transaction opportunities. However, the upturn will be gradual as the financing environment is expected to remain tight.
However, the extent of further repricing is likely to be less than has already taken place between H2 2022 and H2 2023. At current levels, the impact of a change in yields on values will be moderate. We do not expect a strong positive rebound in values to occur for as long as the cost of debt remains high, which is expected to be the case for most of 2024. However, there is substantial variation between sectors and geographies when it comes to current and forecast capital value change (Figure 4).
The office sector has seen substantial yield shifts, as higher interest rates have softened pricing. The sector is also facing uncertainty arising from changes in occupiers’ workplace strategies, and this combination is causing yields to soften further as investors reassess income growth prospects. We expect office yields to reach a peak in 2024.
Multifamily yield shift has been lagging behind the aforementioned sectors. Despite robust investor interest, some further yield expansion will be required in 2024 before the respective price positions of buyers and sellers can realign.
Repricing in high street retail started well before the 2022 market correction but has since advanced at a slower pace than the other sectors. We expect that the sector will continue to see some upward pressure on yields before peaking in 2024 or 2025, depending on the market.
Hotel owners will continue to be buoyed by favourable operating fundamentals, and are reluctant to lower asking prices, so any increase in yields is likely to be modest. Buyers on the other hand remain patient, hoping that falling inflation will lead to lower borrowing costs ahead.
The amount of capital available for core and core-plus makes up 21% of total dry powder. This illustrates the challenge of the current market environment – limited capital targeting core product, but plenty waiting on the sidelines for tactical opportunities arising from a potential market dislocation.
We expect to see an increase in investment volume of around 10% in 2024 compared to 2023, with activity picking up mostly in the second half of the year (Figure 6).
More product will come to market, as a combination of lower values and higher financing costs can make it difficult for investors to refinance, incentivising some to sell. However, there is wide variation between property types and asset quality. Most at risk will be assets acquired and financed during and in the run-up to the market peak that have seen the greatest repricing and weak rental growth.
Key Takeaways
- The European real estate market is expected to see prime capital values bottom out in 2024. However, we do not expect a strong general rebound in values for as long as the cost of debt remains elevated, which is expected to be the case for most of 2024.
- The dry powder available for investment in European real estate remains substantial. Most of this capital is destined for value-add and opportunistic strategies, underlining the challenge for the core segment of the market as investors remain on the sidelines in anticipation of potential tactical opportunities.
- Deal activity is expected to pick up in 2024 as capital values solidify and capital markets conditions improve. Stabilising values will give buyers and sellers more comfort around new price levels. In addition, transaction opportunities may arise from loan maturities.
European prime capital values expected to bottom out in 2024
Values expected to bottom out in 2024 as long rates peak
The European real estate market will likely see prime capital values bottom out in 2024 in most sectors as interest rates stabilise. While interest rates are considered to have peaked in late 2023, earlier rate rises will continue to affect property yields as markets adjust to higher rates.However, the extent of further repricing is likely to be less than has already taken place between H2 2022 and H2 2023. At current levels, the impact of a change in yields on values will be moderate. We do not expect a strong positive rebound in values to occur for as long as the cost of debt remains high, which is expected to be the case for most of 2024. However, there is substantial variation between sectors and geographies when it comes to current and forecast capital value change (Figure 4).
Sector Outlook
Logistics has seen the quickest repricing but is now also the first sector to see values bottom out towards the end of 2023 and into 2024. Part of the repricing has been offset by strong rental growth.The office sector has seen substantial yield shifts, as higher interest rates have softened pricing. The sector is also facing uncertainty arising from changes in occupiers’ workplace strategies, and this combination is causing yields to soften further as investors reassess income growth prospects. We expect office yields to reach a peak in 2024.
Figure 4: Current and Forecast Change in Prime Capital Value
Source: CBRE Global Forecasting & Analytics, Q4 2023
Figure 5: Unallocated Capital Targeting European CRE
Source: Preqin *Estimate
Multifamily yield shift has been lagging behind the aforementioned sectors. Despite robust investor interest, some further yield expansion will be required in 2024 before the respective price positions of buyers and sellers can realign.
Repricing in high street retail started well before the 2022 market correction but has since advanced at a slower pace than the other sectors. We expect that the sector will continue to see some upward pressure on yields before peaking in 2024 or 2025, depending on the market.
Hotel owners will continue to be buoyed by favourable operating fundamentals, and are reluctant to lower asking prices, so any increase in yields is likely to be modest. Buyers on the other hand remain patient, hoping that falling inflation will lead to lower borrowing costs ahead.
Most available capital targeting value-add and opportunistic strategies
Dry powder available for European real estate declined in 2023 when compared with the previous year, the result of both capital outflows and a decline in fund-raising. However, there is still $66bn of capital on the sidelines waiting to be deployed in European real estate (Figure 5). Out of which, almost 63% is targeted towards value-add and opportunistic strategies.The amount of capital available for core and core-plus makes up 21% of total dry powder. This illustrates the challenge of the current market environment – limited capital targeting core product, but plenty waiting on the sidelines for tactical opportunities arising from a potential market dislocation.
Deal activity expected to pick up in the second half of 2024
Clarity on new price levels to support deal activity
Stabilising values will give buyers and sellers more comfort around new price levels. That said, growth in deal activity will be gradual as price discovery continues. Meanwhile valuations will catch up with the rapid change in market pricing which will further reduce the bid-ask spread.We expect to see an increase in investment volume of around 10% in 2024 compared to 2023, with activity picking up mostly in the second half of the year (Figure 6).
More product will come to market, as a combination of lower values and higher financing costs can make it difficult for investors to refinance, incentivising some to sell. However, there is wide variation between property types and asset quality. Most at risk will be assets acquired and financed during and in the run-up to the market peak that have seen the greatest repricing and weak rental growth.
Figure 6: Investment Volume in Europe by Sector and Forecast
Source: CBRE Research and CBRE Global Analytics & Forecasting; November 2023
