European economic conditions remained favorable over the first quarter in 2023. Yet many components of GDP are slowing as interest rate increases bite.
Nonetheless, a receding energy crisis and labour market stability underpins improved corporate and household confidence that likely means Europe will see low positive growth going into 2024.
Disinflation is a slow process in Europe
Headline inflation slowed in June (5.5% YoY, after reaching 8.6% in January). Core inflation remains sticky, having gone back up to 5.5% in June (5.3% in January). Its persistence may mean the ECB is likely to continue rate increases at its next meeting
Investment still plummeting
Persistent inflation means the cycle still has further to run and consequently, many investors are wary of committing to acquisition at existing prices using debt until stability is seen in financing costs.
Overall, between Q2 2022 and Q2 2023, investment decreased by 57%. All asset classes experienced a reduction.
Yields still expanding
The principal factor behind yield expansion is the change in the macro-financial environment. Persistent inflation is prompting more robust response from central banks. Normalization of monetary policy still has further to go and that implies yields may continue to decompress in 2023.
Office: Letting activity slowed in H1 2023
The contraction noticeable in the European office markets from the end of 2022 accelerated in Q2 2023. Take-up at the end of H1 2023 shrank 25% relative to H1 2022. 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.