Europe - CRE 180 report - January 2024

Global picture remains mixed

• The latest economic data paint a mixed picture. In both the Eurozone and the US, the signal from most confidence surveys in December is encouraging. But it is still too early to conclude to a bottoming out.
• The economic situation also remains vulnerable to geopolitical tensions.
• Our 2024 growth forecasts for the OECD countries are close to those of the ECB.

Core inflation now on a downward path

• The rate hike cycle is coming to an end. The weakening of economic activity and lower inflation have met some of the preconditions needed for the the Fed, ECB and the BoE to move towards a neutral stance.
• The consensus expects the ECB to start reducing rates in July, bringing the deposit rate back to 3.25% by the end of the year.

Investment plummeted in 2023

• An unfinished repricing process kept Investment in the deep freeze over 2023
• All asset classes experienced a strong reduction. Offices (-59%) showed strongest declines while hotels (-26%) and retail  (-40%) incurred the least declines. Logistics volumes fell 48% though this sector has experienced some of the most rapid repricing and may now be stable. 

2023 was marked by yields decompression

• 2023 will be regarded as the year of yield decompression with European markets characterized by protracted price discovery processes across all asset types.
• The bond yield gap between government bond yields and real estate only truly began to firm up in H2 2023.  It means that the rethinking about the prices being paid for assets has a clearer framework and prices have better chance to settle. 

Office: Letting activity remained subdued in 2023

• 7.60 m sqm was transacted in Europe’s 17 main markets over 2023, down by 19% vs 2022. Annual volumes are below their long-term average (-16%).
• This decline is mostly due to a reduced number of very large transactions. Occupiers are looking for space optimization to meet hybrid working patterns and reduce costs.

The flight to quality continues

• While hybrid work models are here to stay, workplace plays a key role in attracting and retaining talent, both in terms of space quality and location. Demand is also high for energy-efficient and sustainable buildings. 
• These increasing quality requirements drive values up for modern buildings located in the most established districts.