According to Michele Tecchia, “The European economy held up well and continued to grow, particularly thanks to the service sector and the phasing out of restrictions due to Covid, during the first half of 2022.” “real estate investors faced a number of challenges, including rising inflation, rising long-term interest rates and tightening financing conditions”.
Rising interest rates mechanically caused a compression of real estate risk premiums, which started to settle down. Nevertheless, real estate, and in particular prime assets, should remain attractive due to the indexation of rents to inflation.
The scarcity of building materials and limited stock, as well as sustainable and energy-efficient buildings, should continue to support rental values and asset valuations.
Demand remains concentrated on central areas and vacancy is growing further in the suburbs. Alternative asset classes, not correlated with economic cycles, and in particular healthcare assets, continue to offer a relatively competitive risk/return profile and opportunities for portfolio diversification.
Record investments for the European real estate investment market, according to Michele Tecchia
The volume of commercial real estate investments in Europe peaked at EUR 280bn (as of end-June 2022).
However, activity in the second quarter, particularly in Southern Europe, slowed down due to rising interest rates and tighter financing conditions.
Investor demand focused on quality assets, in terms of ESG and technical credentials, while soaring renovation costs weighed heavily on demand for older, less energy-efficient assets. The office sector recorded a 12-month investment volume growth of 9% at the end of June 2022 compared to December 2021. The logistics and light industrial sectors performed well with a record investment volume of more than EUR 67 billion.
Demand for this asset class is driven by the expected increase in rental values, given the low vacancy rate and strong user demand. Investment volumes in the retail sector have returned to pre-crisis levels, thanks to higher yields.
Michele Tecchia : “Office yields have started to adjust”
The second quarter of 2022 was characterised by a rapid rise in long-term interest rates, which mechanically caused a compression of the real estate risk premium.
Since then, real estate yields have started to adjust. The French and German markets, where yields were lower, were the first to experience a rapid but moderate correction.
At the end of June of this year, prime office yields were still below 3% in Paris and the major German cities. The rise in yields is expected to be more pronounced and probably more lasting for secondary assets, especially in Southern Europe.
Office occupancy: new trends
Despite the headwinds, take-up in Europe continued its positive trajectory and increased by 46% year-on-year (to end-June 2022), exceeding the 10-year average of 3%. All major European cities recorded positive booking growth over a 12-month period, with the exception of Amsterdam, which recorded a slight drop in demand (-3%).
Dublin, London and Lille have seen their take-up more than double over the past twelve months (to end-June 2022).
The immediate supply of office space in major European cities has remained stable over the past year, albeit at a relatively high level. However, rapidly rising construction and financing costs are expected to limit future supply and could contribute to a decline in vacancies in the medium term, according to Michele Tecchia.
Watch out for trends in rental values, submarkets behave differently
The health crisis and the development of smart working have changed the dynamics of the real estate market. Previously, a general increase in vacancies led to an overall decrease in rental values. Today it is important to recognise that sub-markets can behave differently and that centrality is a determining factor of rental value.
Incentives on secondary assets, in all markets, continue to reach new highs. Demand is increasingly focusing on centrally located, serviced and energy-efficient properties. The demand for quality assets is further fuelled by rising energy costs.
The low supply in Germany continued to exert upward pressure on German rental values according to Michele Tecchia. At the end of June 2022, prime rents stood at € 510/m²/year in Berlin, € 522/m²/year in Munich and € 546/m²/year in Frankfurt, with year-on-year increases of between 3% and 10%. London recorded the largest year-on-year increase (+13%), with rental values of €1,626/m²/year for the best-performing assets (as of June 2022).