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Commercial property investment started to recover from a two-year slump towards the end of 2024, as investors turned to sectors such as residential property and continued to avoid office buildings.
A spate of dealmaking in the second half drove the recovery, pushing the value of deals completed in Europe up 4 per cent to €189bn last year, after slumping 45 per cent the year before, MSCI said on Thursday. The findings came a week after the data provider reported a 9 per cent increase in US investment.
The recovery was led by investors shifting their focus to hotels and apartments, and putting more money into warehouses as they bet on growth in ecommerce. The traditionally dominant office sector recorded a 10 per cent drop in investment, its worst year since 2009, due to hybrid working.
Chris Brett, head of capital markets for Europe at commercial property brokerage CBRE, said the market had “bottomed out” in early 2024 and would continue to be supported by investors favouring residential property.
“Living is going to dominate [and] that isn’t going to change,” he said. “There is more intent to invest going into 2025 than there was going into 2024.”
Real estate dealmaking peaked in late 2021, fuelled by low interest rates even as lockdowns clouded the outlook for offices. But it fell sharply in 2022 as borrowing costs rose and hammered property values.
Prices have fallen 23 per cent on average across Europe since the peak, with office values falling 38 per cent, according to real estate analysts Green Street.
Sentiment towards office buildings has been hit as landlords face big bills to upgrade old buildings, and by uncertainty over future demand. Analysts have also warned that the broader recovery could falter if interest rates stay elevated for longer than anticipated.
“The mood in the market is on the cautious side of optimistic,” said Tom Leahy, head of Emea real assets research at MSCI. “Recent volatility in the bond market raised the possibility that rates will stay higher than expected.”
US private equity groups were the biggest buyers of commercial property, led by Blackstone along with TPG, Starwood, KKR, Ares and Greystar.
Blackstone’s sale of a luxury Milan retail block to Kering, sales of stakes in the UK’s Liverpool One and Meadowhall shopping centres, and a deal for Elliott Management and Oval Real Estate to buy assets from the Langham Estate in central London were among the largest deals in 2024.
This year has started with Abu Dhabi’s Modon Holding agreeing to buy half of GIC and British Land’s new skyscraper at Broadgate.
Brett said the transaction was a “good shot in the arm for office development” and showed that London was still “the biggest magnet for international capital in Europe”.
Volumes in the UK recovered by 26 per cent in 2024 as a sharp correction in asset values boosted dealmaking because sellers were more willing to accept lower prices.
The real estate market on both sides of the Atlantic has seen fewer distressed loans and forced sales than many analysts predicted as banks avoided writing off bad loans.
But a New York Federal Reserve paper published in October last year warned that this “extend and pretend” approach “might slow down the capital reallocation needed to sustain the transition of real estate markets to the post-pandemic equilibrium” and expose banks to future losses.