Real Estate for a changing world

Europe - CRE 180 report - April 2023


Modest growth in Europe

In March, economic conditions in the major OECD economies remained favorable to limited expansion. In Europe, we are still seeing catch-up effects in energy-intensive sectors and the labour market remains resilient to current economic shocks.
However, we are still cautious as there are lots of uncertainties in the global economy. Growth remains finely balanced against recession.

Disinflation: a slow process

Inflation barely slowed in February (8.5% YoY, after reaching 8.6% in January) as the drop in the contribution of the energy was offset by the increase in food and services prices. As a result, the ECB should continue to increase rates over the mid-part of the year.

Investment plummeting

The rapid acceleration in financing costs from mid-2022 destabilized pricing in the market, resulting in investment plummeting by Q4 as buyers and sellers pulled back. Over the 12 months ending with Q1 2023, investment reached €219 almost reaching Q1 2021’s low point.
Overall, between Q1 2022 and Q1 2023, investment decreased by 60%. All asset classes experienced a strong reduction.

Yields are expanding

Bond yields are growing very rapidly, reducing the yield gap with real estate and prompting rethinking about the prices being paid for assets.
Mid-2022 showed the first signs of expansion that have strengthened since. Decompression is affecting all the main sectors of real estate.

Office letting activity: a quiet start to 2023

While 2022’s overall take-up returned to its long-term average in Europe, the contraction noticeable in few markets at the end of 2022 extended across Europe in early 2023. Take-up at the end of Q1 2023 shrank 23% relative to Q1 2022.
Most markets have experienced decline in volumes, mostly due to a reduced number of very large transactions.

An increasing focus on quality over quantity

With the widespread uptake of hybrid work models, companies are seeking attractive and modular workplaces offering greater connectivity. Demand is also high for energy-efficient and sustainable buildings. These increasing quality requirements drive values up in the most sought-after markets and has widened the gap between prime and  average rental values.

CRE180 - April 23
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