MSCI report highlights German decline among European markets

The latest Europe Capital Trends report from MSCI illustrates the extent of the decline in the volume of European commercial real estate investment in the 3rd quarter.

Total completed transactions fell 37% to €53bn in the quarter compared to a year earlier, with all the major asset categories showing reduced volume. The number of parties completing deals fell to a nine-year low, while the number of properties sold was the lowest since August 2020. Nine of the ten largest national markets surveyed saw falls in volume, with Spain (in fifth place) the only exception, boosted exceptionally by PGGM's acquisition of a major student housing portfolio.

In its report, MSCI says: “The impact of the war in Ukraine and of the resultant higher energy costs, rising interest rates and faltering economic growth has started to impact the European property market in a meaningful way. The outlook for real estate investment has deteriorated over the course of the year, but the lag time between world events and the direct property market means that the slowdown has become increasingly evident in the third quarter.”

The German market was immediately impacted after the Russian invasion, given its dependency on Russian energy supplies. German transaction volumes have fallen by 24% over the first nine months, led by office and residential. London and Paris, being the largest and most liquid markets, have actually seen increases of 17% and 11% in investment volumes respectively. Within these markets, buildings with good environmental ratings have been commanding noticeable price premiums.

As MSCI write in their report, “The property industry has changed in the last three-to-four years, with occupiers and owners acknowledging the urgent need to mitigate real estate’s contribution to climate change. This shift has meant an emphasis on buildings that either already meet, or have the capacity to meet, ambitious carbon-reduction targets. This preference is increasingly evident in the aggregate pricing data. A hedonic analysis of London office prices, which controls for factors that impact building value such as age, size and submarket location, shows a sizeable and growing premium for assets which have environmental ratings from the likes of BREEAM and LEED.”

Is this only valid at the very top end of the market? Tom Leahy, head of EMEA real assets research at MSCI, warns: "There’s a growing body of evidence of falling prices in Europe. Our UK Monthly All-Property Index in September showed the fastest fall in capital values since mid-2016. Adding to the uncertain investment environment are the pressures high interest rates are placing on borrowers refinancing mortgages.”

In the UK, investment volumes were down 33% in the third quarter from a year earlier to €13.4bn, a two-year low led by a slowdown in office transactions. Despite this, the UK overtook Germany as Europe’s largest commercial real estate investment market, where investment volumes dropped by 36% in the third quarter to €11.7bn, with domestic investors largely staying out of the fray.

Germany in a European comparison

MSCI has also produced a comparison of turnover in the most important European markets in the years 2020, 2021 and 2022. Among the largest markets, the figures for Germany do not look encouraging, with German cities slipping noticeably in the rankings.

In terms of turnover the list is headed by London (with a nine-month turnover of US$21.7 billion in 2022) and Paris ($13.5 billion). Both big cities grew significantly compared to the same period of the previous year, but recorded a noticeable slowdown in deal volume in the third quarter of 2022. German cities were affected by this downturn earlier in the year, which had an impact on their positioning in the MSCI ranking: Berlin, still the most active transaction market in Europe in 2021, is in fourth place this year. In the capital, the transaction volume has halved year-on-year - marking the sharpest decline among all 25 markets surveyed.

The other German cities and regions have also slipped in the activity ranking, with Munich (from fifth to tenth place) and Hamburg (from seventh to twelfth) the most active. In terms of transaction activity, Cologne (22nd place) is still behind the sanction-hit investment market Moscow as well as the Ruhr region and the British B-city Manchester. This is a reflection of the generally poor state of the German real estate market, the analysts write.

There are only two German categories in the top ten most sought-after types of use: Flats in Berlin (fourth place) and offices in Munich (tenth place). Overall, offices and logistics properties in London and office buildings in Paris are the most sought-after asset categories.