Moderately positive
Moderately negative

Sector conditions and outlook1


Residential values have not been immune to the impact of rising interest rates. However, the re-pricing of this property type has been more modest than previously anticipated, although with some exceptions. Meanwhile, in response to the cost of living crisis and worsening housing affordability, several European governments have introduced or extended measures to curb rental growth. Nevertheless, the living sector ranks among investors’ top preferences amid structural supply-demand imbalance and low institutional penetration.

Current conditions:

The hotel sector has started the year quite well, benefitting from growing investor appetite. Preliminary figures show that transaction volume reached €4.4bn in Q1 2024, representing an increase of 20% over the same period last year and the strongest first quarter since Q1 2019. RevPAR, the primary metric used to measure the hotels’ revenue performance, increased by 5.5% in Q1 2024 compared to a year ago. Meanwhile, European tourism is expected to gain further momentum in the remainder of the year, and resume its long-term upward trajectory.

Current conditions:

Industrial capital values contracted by 2% on average across Europe in Q4 2023, the sixth consecutive quarterly decline since the peak in mid-2022. However, this re-pricing has been entirely capital markets driven, as structural tailwinds continue to support the medium-term fundamentals of the sector. Meanwhile, e-commerce penetration, the key structural driver behind the expansion of the logistics asset class, increased in most European countries in 2023, excluding Germany and Sweden. Thus, the continental average reached 15.8%, a level significantly below the UK’s 26%.

Current conditions:

The sentiment towards the office sector remains extremely weak. Values have declined by a further 5% in Q4 2023 on average across Europe, extending the sector’s price adjustment to -23% from its post-pandemic peak, according to the MSCI property index. Equally, preliminary transaction figures for Q1 2024 point to one of the weakest quarters since records began in 2007. However, investors should not be misled by the overall negative picture. High-level figures can mask the resilient performance of high quality offices in supply constrained locations.

Current conditions:

European retail property values declined by 2% on average in Q4 2023, the sixth consecutive negative quarter. Thus, since central banks tightened interest rates, the retail sector’s re-pricing extended to -13%. Fundamentals in the occupier market are improving due to several factors, including easing inflation, a recovery in consumer confidence, and a pick-up in tourism. Rent collections and vacancies have normalised after the extreme stress of COVID-related closures and rent holidays.

Current conditions:
Data centres

The data centre sector has the brightest outlook in our view. Developing new sites is becoming increasingly challenging due to limited power supply and scarcity of available permitted land. Vacancy rates in Tier 1 markets declined significantly in Q4 2023, with the tightest market, Frankfurt, having a sub 1% vacancy rate, according to DCByte. Barriers to entry and supply bottlenecks in tier 1 markets continue to translate into very substantial rental growth and increasing penetration in secondary markets across Europe.

Current conditions:
Student housing

Student housing is one of the sectors considered most attractive by institutional investors, amid a growing student population and a concurrent decrease in the availability of private rental properties for students (or shared apartments) that traditionally cater for the vast majority of beds. Indeed, this is the symptom of a broader housing availability and affordability crisis undergoing in several European cities. Meanwhile, the sector was not exempt from the slowdown affecting real estate capital markets. Thus, transaction volume declined to €5 billion in 2023, the lowest annual amount over the last eight years.

Current conditions:

Healthcare transaction volume reached €5.7 billion in Europe for the whole of 2023, representing a decline of 27% over the year prior. Preliminary data for Q1 2024 point to another quarter of subdued activity amid low sentiment and difficult financial conditions. Although the sector is widely recognised for benefitting from positive long-term drivers such as ageing demographics and the rise of chronic diseases, it is currently in a phase of cyclical weaknesses due to high operational costs and shortage of skilled labour.

Current conditions:

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

For our detailed perspective on the conditions and outlook for each sector, please download the full Europe Real estate sector report.

Real estate

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MM12006-04 | 04/2024 | 3536621-062025