Real estate
Real estate

Europe Real Estate Sector Report

Autumn 2023

October 25, 2023 | 20 min read
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Key:

Improving
Neutral
Deteriorating
Positive
Moderately positive
Neutral
Moderately negative
Negative

Sector conditions and outlook1
Office

Office sector transaction volume in Q2 2023 was the lowest on record as macroeconomic headwinds and concerns over hybrid workers kept investors on the sidelines. Capital values dropped by 16% on average across Europe over the last eighteen months. This was driven by the UK where borrowing costs have risen more than in the Eurozone and the shift towards hybrid working has been more pronounced than in mainland Europe. Nevertheless, office availability in main central business districts remains generally low, while vacancy rates in secondary sub-markets have recorded an uptick as more companies relocate while downsizing.

Current conditions:
Outlook:
Industrial

The industrial sector recorded the sharpest repricing as values declined by 20% from their peak as of June 2023. Prime net yields have softened across all core markets, driven by Glasgow and Edinburgh. However, the quarterly pace of softening has generally slowed considerably, and it is likely to flatten in Q1 2024. Meanwhile, occupier demand remains robust, although perspectives are weakening as the lagged impact of high interest rates weighs on the economic outlook and global trade.

Current conditions:
Outlook:
Residential

The steep house price appreciation seen in the last few years and the recent spike in interest rates have significantly worsened housing affordability and locked several new buyers out of the market. Mortgage approvals fell sharply, followed by a drop in house prices. Meanwhile, builder sentiment weakened across Europe, although with different intensity. Total returns in 2023 are likely to stay negative, but the long term attractiveness of the sector remains strong amid growing demand for rentals and sluggish supply.

Current conditions:
Outlook:
Hotel

Transaction volume declined by 12% to €6.5bn in H1 2023 over the same period last year and 37% over the pre-pandemic long-term average. Capital values remain 14% from the pre-pandemic peak, according to MSCI. Conversely, hotels’ operational results were quite strong and ahead of expectations. In Amsterdam, RevPar increased by 58% in H1 2023 compared to the same period last year, followed by Milan (51%), London (39%) and Paris (37%). This is despite the fact that occupancy rates have not yet recovered to pre-COVID levels.

Current conditions:
Outlook:
Retail

The retail sector is the only sector achieving positive total returns so far this year due to a mix of different factors. First, retail yields had already softened significantly during the pandemic; thus they could better absorb the spike in base rates. Second, a growing number of retailers took advantage of the feeble deal activity to purchase their premises, putting a floor on values. Finally, the returns of commuters and the resurgence of tourism during the summer season have contributed to increased high street footfall and bolstered operator sentiment. Across the retail sector, out of town retail parks have the brightest outlook in our view.

Current conditions:
Outlook:
Data centres

In the six months to June 2023, take up and new supply continued to increase, although at a lower rate due to difficulties in securing and delivering new capacity. Vacancy rates across the FLAPD markets (Frankfurt, London, Amsterdam, Paris, and Dublin) have declined further and are forecast to reach 11% by the end of 2023, marking the fourth consecutive year of decline. Meanwhile, hyperscalers are looking to expand outside core markets by investing in smaller data centres across multiple locations near the edges of their regional networks to accommodate growing demand and limit latency.

Current conditions:
Outlook:
Healthcare

The healthcare investment market has been slow so far this year. Transactions reached €3bn in H1 2023, a 25% decline compared to the same period last year. Net initial yields for prime assets have softened marginally to an average of 5.3% as of June 2023, according to MSCI. Capital flow is expected to remain subdued given the wide price gap between buyers and sellers. Additionally, the occupier market is strained by several challenges—weakened by an extended period of lower occupancy rates, high borrowing costs, funding gaps, and a shortage of qualified workers. Restructuring and insolvency cases are on the rise.

Current conditions:
Outlook:
Student housing

According to MSCI, UK student housing averaged 9% total return over the last ten years (2013-2022), the second best-performing property type after the industrial sector. However, in the first half of 2023, returns were modest at around 1% as student housing suffered from yield softening, although less than other sectors. As a result, capital values declined by 8% from the peak of last year as of June 2023. The occupier market performed strongly across Europe, with most operators reporting occupancy rates above 95% in Q3 2023. Thus, rents have increased by 4 to 6% in Q3 2023 over the prior year, however, cities with the highest student-to-bed ratio recorded an increase of 10%.

Current conditions:
Outlook:

1 Outlook refers to the next 12 months
Source: Principal Real Estate, September 2023

For our detailed perspective on the conditions and outlook for each sector, please download the full Europe Real estate sector report.
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MM12006-03 | 10/2023 | 3163286-122024