European commercial real estate investment plummeted in the final quarter of last year, led by Germany amid a generalized slump in values and total returns from property holdings, according to the latest report from MSCI Real Assets, a part of MSCI.
The volume of completed transactions fell 66% to 53.9 billion euros in the fourth quarter of 2022 from a year earlier, with all the major real estate sectors registering declines. Investment activity in Europe last year fell 25% to 291.5 billion euros. Germany suffered a 55% drop in investment in 2022 after recording a European record of 113 billion euros in 2021, ceding its place to the U.K. as the continent’s top national investment market.
Tom Leahy, Head of EMEA Real Assets Research at MSCI, said: “The extraordinary change of fortune for the German market highlights what a tumultuous year it has been. The uncertain economic outlook, interest rate hikes, accelerating inflation and the conflict in Ukraine have made the investment landscape unrecognizable from a year ago. The speed at which values have corrected, to reflect higher borrowing costs, has created a wide disparity in price expectations for buyers and sellers, resulting in the dramatic drop in transaction volumes.”
The industrial and residential sectors, most favored by investors during the Covid-19 pandemic, registered the sharpest declines in investment activity last year as values adjusted to higher debt costs. Conversely, investment volumes for retail – a sector that lost favor during national lockdowns — fell only 3% in the year to 38.4 billion euros, supported by deals such as BNP Paribas and Société Générale’s purchase of a 45% interest in the Westfield Carré Sénart shopping center in the Greater Paris region.
Large transactions had a marked impact on the performance of some markets in 2022, lifting investment volumes notably for the French, Belgian and Spanish markets. The second-largest transaction in the final quarter of last year was Brookfield’s 2.8 billion-euro purchase of Belgian real estate investment trust Befimmo. Similarly, Europe’s student housing market was propelled to a record of 15.1 billion euros of investment by large portfolio deals such as GIC and Greystar’s 3.9 billion-euro acquisition of the Student Roost portfolio in the U.K.
Elsewhere, deals in 2021 amplified the relative declines in the following 12 months for other markets. For example, no deal in Germany, Berlin and the European apartment market last year came close to matching the scale of Vonovia’s mammoth acquisition of fellow German listed residential landlord Deutsche Wohnen, which completed in the final quarter of 2021.
Tom Leahy concluded: “Slowing economic growth, higher interest rates and falling values have transformed the investment return profile of property assets, so they can no longer be treated as a proxy for bonds. Investors will be reassessing where real estate fits into their portfolios as a result.”
In Germany, the Q4 Europe Capital Trends report highlighted:
- Investment volumes declined 84% in the fourth quarter from a year earlier to 9.7 billion euros. The decline for the year was 55%, taking annual volumes to 51.0 billion euros, a nine-year low
- Germany slipped behind the U.K. as Europe’s biggest investment market in 2022. Investor sentiment was adversely affected by the economic impact of sanctions on Russia, the country’s major source of energy supplies, and as higher interest rates made German real estate appear very expensive
- MSCI Real Assets calculates there is a 25% price expectations gap between buyers and sellers, underscoring how illiquid the German market has become
- Berlin, last year’s top investment destination in Europe, registered a 79% fall in investment volumes to 7.8 billion euros, to rank the city behind London and Paris respectively
In the U.K., the Q4 Europe Capital Trends report highlighted:
- Investment volumes fell 61% in the fourth quarter from a year earlier to 11.5 billion euros. The count of properties that traded was the lowest since 2011
- For the year as a whole, transactions totaled 7.3 billion euros, a 15% decline from 2021. It restored the U.K. as Europe’s largest commercial real estate investment market, at the expense of Germany
- London also returned to first place in Europe’s top investment destinations in spite of a 13% decline in overall investment volumes in 2022 to 25.5 billion euros. This followed a two-year hiatus, when it lagged behind Paris (2020) and Berlin (2021)
- Europe’s largest single property transaction was the National Pension Service of South Korea’s 1.4 billion-euro purchase, through LaSalle Investment Management, of the UBS headquarters in the City of London
- The London office market registered the second weakest level of investment on record in the final quarter of 2022. Values of City of London offices fell 14% and there was an 8% drop in values in the West End and Midtown office markets last year, according to the MSCI UK Monthly Property Index
In France, the Q4 Europe Capital Trends report highlighted:
- Investment volumes declined 39% in the fourth quarter to 8.7 billion euros, however overall investment volumes for the entire year were 3% higher at 37.8 billion euros
- Paris registered a 6% increase in transaction volume to 21.3 billion euros last year as a result of large office and retail deals. The city overtook Berlin as Europe’s second-largest investment destination
- Société Foncière Lyonnaise’s 574 million-euro acquisition of the Amundi headquarters in Paris and a Brookfield-led venture’s purchase of 150 avenue des Champs Elysées for 648 million euros were among Europe’s 10 largest single property transactions last year
- French retail property volumes increased to 5.4 billion euros from 3.0 billion euros in 2021 as domestic investors stepped in. BNP Paribas and Société Générale’s purchase of a 45% interest in the Westfield Carré Sénart shopping center in the Greater Paris region exemplified this trend
- Unibail-Rodamco-Westfield was the biggest seller of French retail properties as it sought to raise capital to lower its debt