Despite decade-low investment volumes in EMEA in 2023, bright spots point to an upside in activity in 2024

Results from a muted fourth quarter confirmed that European commercial real estate investment in 2023 slowed to the lowest in a decade. However, with financial conditions stabilising and price adjustments steadily progressing, signs of increased activity should translate into higher volumes in the second half of 2024, according to the latest Capital Markets Snapshot for Europe, the Middle East and Africa (EMEA) by Colliers.

Market performance in 2023 was jumbled, with in-country disparity

The UK and Germany were among the markets where annual deal volumes hit lows not seen since the Eurozone crisis, as higher interest rates weighed on the case for investment and contributed to a mismatch between the price expectations of buyers and sellers. However, trophy assets in central locations like London’s West End continued to attract interest, and in some countries the picture was substantially brighter, with Spain seeing strong inflows into the hotels sector in Q4 2023.

Appetite to explore alternatives rises

Colliers experts note investors have broadly updated their strategies to reflect the new operating environment, with interest pivoting further to alternative and contra-cyclical assets such as student housing, data centres and life sciences. Purpose-built student accommodation (PBSA) has emerged as an area of particular interest in markets such as the UK and Italy.

“Every country in Europe is arguably under-supplied in the student housing sector,” says Luke Dawson, Colliers’ Head of Capital Markets, Global and EMEA. “Adding to its appeal is that rental growth is much more dynamic, due to generally short leases, and its counter-cyclical properties, given even in tough times education remains a priority.”

Recovery is expected, but not until later in the year

With expectations consolidating around interest rates dropping back in the second half of 2024, some long-delayed transactions are poised to close in the quarters ahead. Pressures on corporate balance sheets created by tighter financial conditions could also drive deal activity, as seen with the sales launched by Austria’s struggling Signa Holding.

“Despite fundraising still being difficult, the amount of dry powder that is available for real estate is significant,” says Damian Harrington, Colliers’ Head of Research, Global and EMEA Capital Markets. “Sources of capital continue to diversify, with private wealth increasingly active. Everyone is waiting for the right opportunity to deploy, particularly if we get a clear indication that interest rates will come off in the back half of the year. The listed sector continues to be priced at some heavy discounts to net asset value. Improvements and activity in the sector throughout Q1 should spur momentum in the broader market.”

London West-end bucks UK trend

For the first time since the Global Financial Crisis, the UK’s annual transaction volumes failed to cross the £40 billion mark in 2023. Many investors appear to be waiting for signs that interest rates and gilt rates have peaked, although appetite in prime London locations remains healthy. Colliers anticipates a stronger 2024, with volumes rising to around €50 billion as refinancing needs combined with higher debt costs bring more promising assets to market.

ESG standards cause second-guessing in Germany

Germany saw transaction volumes of €24.1 billion in 2023, the lowest annual total since 2012. According to Colliers experts, one factor restraining the market is investors’ concerns over the ESG performance of some assets, given the potentially high capital expenditure needed to bring them in line with rapidly evolving regulations and occupier expectations. On the flip side, some ageing assets are being targeted for ‘brown to green’ redevelopment strategies. This is a reflection of activity across Europe, with Colliers Global Investor Outlook survey showing almost two-thirds of investors are looking to deploy capital into ESG-led value-add and development plays. Only one-third are looking at ESG core buying strategies, and 50% of these are indirect.

Student housing a bright spot in Italy

For investor interest and activity in Q4 Italy was a bright spot in Europe. Student housing was the focus of the activity. Europe suffers from a shortage of student housing across the board, but Italy faces one of the most acute mismatches between supply and demand, and this is likely to encourage further investment in cities and university towns.

Spain and Portugal benefit from robust private capital inflows

Spain bucked the Europe-wide trend in Q4, with investment volumes of almost €4 billion beating expectations by over 30% versus the same quarter of 2022. The result was driven by the strong performance of the hotel sector, as well as capital inflows from private sources both domestic and Latin American, a trend also being seen in Portugal.