Europe Real Estate Sector Report

Autumn 2024

October 9, 2024 | 20 min read
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Key:

Improving
Neutral
Deteriorating
Positive
Moderately positive
Neutral
Moderately negative
Negative

Sector conditions and outlook1

Office

The outlook and sentiment associated with the office sector remain weak. The sector is likely to lag behind the other property types for the remainder of the year. Pockets of strength in amenity-rich sublocations are the exception. Prime yields, on aggregate, have softened for the ninth consecutive quarter, though by the lowest amount since the correction began in Q2 2022. Hybrid working remains widespread and occupier demand continues to be highly polarised. European vacancy rates up by a further 80bps in Q2 2024, to 14.7%, according to the MSCI Property Index.

Current conditions:
Outlook:
Industrial

Values turned positive after seven consecutive quarters of decline. The pivot suggests the sector might have entered a recovery phase following a peak-to-trough correction of 21%. Overall, momentum is picking up among investors and occupiers. Supply remains relatively tight, though vacancy has crept up marginally. Rental growth has slowed compared to previous years, while occupiers’ demand gravitates towards modern, energy-efficient assets with high sustainability credentials.

Current conditions:
Outlook:
Residential

Values have turned positive in Q2 2024 (+1%) after seven consecutive negative quarters and a peak-to-trough decline of 14%. The Netherlands was the bestperforming market (+2.3%), followed by the UK (+1.5%). The wider apartment sector—multifamily, single-family, built-to-rent, co-living, student and senior housing—overtook offices as the most invested property type in Q2 2024 owing to favourable structural trends, including acute housing affordability pressure. Falling interest rates and energy costs will provide additional support to the sector by lessening the pressure on disposable incomes.

Current conditions:
Outlook:
Hotel

Hotel sector performed quite well amid increasing investors’ appetite, a spike in tourism, and increasing business travel demand. Transaction activity reached €5.6bn in Q2 2024, a jump of 90% over the year prior. It was the fourth-highest second quarter by volume since records began in 2007, largely driven by a return of previously deferred portfolio deals. RevPAR increased by 4% in H1 2024 year-on-year, sustained by a rise in room rates and, to a lesser extent, higher occupancy. Spain and Italy were the two best-performing markets.

Current conditions:
Outlook:
Retail

Capital flow declined by roughly 16% in Q2 2024 compared to the same period last year, down to €7.1bn, the fourth lowest level since 2010. The fall was driven by France and Germany, whose weak performances were widespread across all property types, owing to a precarious political and economic environment that is tempering their recovery. Capital values increased by 0.3% in Q2 2024 after seven consecutive declines. Retail warehouse was the best-performing retail segment (1.4% capital growth).

Current conditions:
Outlook:
Data centres

Data centres remains the sector with the brightest performance and outlook owing to structural supply-demand imbalance. Limited availability of land and power hinders the delivery of new capacity, while the migration to cloud computing and AI keep fuelling demand. Thus, pressure on rents intensified, leading to double-digit growth in several geographies. In the core markets (FLAPD), take up for colocation space exceeded new supply. Vacancy rates declined below 10% for the first time since records began.

Current conditions:
Outlook:
Healthcare

The sector continues to grapple with ongoing challenges, including a shortage of workers, a lack of funding, and financial pressure. Transaction volume reached €1.6bn in Q2 2024, a decline of approximately 30% over the prior year, and way below the five-year average. The fall was driven by Sweden, France, and Germany, partially offset by Spain, the Netherlands, and Ireland. Capital growth turned positive after eight consecutive quarterly declines. Yields softened by a couple of basis points to 5.52%, while rents improved by 0.9%.

Current conditions:
Outlook:
Student housing

Student housing investment volume jumped to €2.8bn in Q2 2024, which was the third-highest second quarter since records began in 2007. However, the robust performance was skewed by a sizable portfolio deal worth approximately €1bn. In our view, the UK student housing market commands some caution in the short term until the impact of the new student visa rule is fully understood. Since it came into effect in January, study visa applications have declined by 17% compared to the same period last year. If this trend persists, it has the potential to undermine the financial sustainability of less prestigious universities.

Current conditions:
Outlook:

1 Outlook refers to the next 12 months
Source: Principal Real Estate, September 2024.

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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MM12006-05 | 09/2024 | 3898014-092025