UK drives resurgence in European office investment

The UK is at the forefront of a renewed surge in European office investments, leading a comeback in the commercial real estate sector. Increased demand for office spaces, particularly in key cities, is driving this growth, signaling a positive trend in the market. The UK’s strong performance is helping to boost investor confidence across Europe, contributing to a broader recovery in office property investment.

LONDON — The U.K. is spearheading a revival in Europe’s long-depressed office real estate sector, with investments expected to increase further in the latter half of the year.

In the first six months of 2024, the U.K. registered office transactions worth €4.1 billion ($4.52 billion), representing nearly a third (29%) of all European office deals, according to August data from Savills.

This marks a five-percentage-point rise from the five-year average (24%) and exceeds France’s €1.8 billion (13%) and Germany’s €1.7 billion (12%). The surge follows a prolonged slump in the office market, hit by post-pandemic shifts and rising interest rates. European office transactions in H1 2024 were down 21% year-on-year to €14.1 billion, a 60% drop from the five-year H1 average.

However, experts foresee increased momentum from September onward as interest rates decline and investors look to benefit from favorable pricing conditions. “The H1 transactional data lags market sentiment, but future indicators are positive,” said Mike Barnes, associate director of Savills’ European commercial research team. Europe’s uneven recovery The U.K. real estate market was the first to experience significant contraction after peaking in 2022.

However, the resolution of the July general election and the Bank of England’s initial rate cut have added clarity to the market, boosting the recovery, particularly in London. “London is leading the rebound, partly due to its earlier and faster repricing,” said Kim Politzer, head of research for European real estate at Fidelity International.

Higher returns have contributed to this rise, with average office yields in London exceeding 6% this year, compared to around 4.5% in Paris, Stockholm, and major German cities like Berlin and Hamburg. This recovery is expected to spread to other markets as the European Central Bank continues lowering rates, reducing debt burdens, and improving liquidity.

“One key barrier to liquidity in Europe’s real estate market has been interest rates and financing,” said Marcus Meijer, CEO of Mark, on CNBC’s “Squawk Box Europe.” “Lowering rates will unlock liquidity,” he added, projecting optimism for the next 12 to 18 months.

Ireland and the Netherlands, which often mirror the U.K.’s trends, are now gaining momentum, Savills noted. Strong economic growth and higher office occupancy in Spain, Italy, and Portugal also point to resilience. “Southern Europe looks particularly strong in terms of office take-up,” said James Burke, director of Savills’ global cross-border investment team. In contrast, France and Germany, grappling with political instability and slow growth, are lagging. Tom Leahy, head of EMEA real estate research at MSCI, attributed this to a “gulf in price expectations” between buyers and sellers.

“The gap is wider than ever, and the markets are very illiquid right now,” Leahy said, predicting further repricing. Concerns about occupancy Despite the recovery, office occupancy rates remain a concern for investors. Europe’s return to the workplace has been stronger than the U.S., with vacancy rates at 8% compared to the U.S.’s 22%, according to JLL, but overall utilization remains below pre-pandemic levels.

In 2023, European office take-up was down 17% compared to pre-pandemic averages, Savills reported, reflecting tenant downsizing or lack of expansion. This year has shown improvement, with 61% of companies reporting office utilization of 41-80%, up from 48% in 2022, according to CBRE. Almost one-third anticipate further increases in attendance. A divide has emerged, with tenants favoring modern, functional buildings to attract employees back. Central business district (CBD) properties near public transport and amenities are in high demand and attract a wide variety of tenants.

“Micro-locations near transport links and highly amenitized areas like food and leisure spots are crucial,” said Savills’ Burke. This trend aligns with a shift toward greener buildings as the U.K. and EU implement new energy efficiency regulations. Grade A offices—recently built or renovated—dominated 77% of London’s office leasing in Q2 2024, a record high, according to Cushman & Wakefield. In June, Fidelity highlighted that green building credentials could become the “single most important trait” in the next investment phase. Landlords with such properties can command a “green premium” and higher rents, Politzer noted.

“There’s a shortage of Grade A green buildings, and they typically lease up while still under construction or refurbishment,” she added. This will likely attract investment from “opportunistic players” into green properties, while those who fail to upgrade may face difficulties. Additionally, a lack of new developments is expected to drive growth in high-quality offices in the coming years.

Looking forward, Andy Tyler, head of London office leasing at Cushman & Wakefield, noted, “A constrained development pipeline suggests a decrease in overall and Grade A vacancy rates over the next year, fueling rental growth, particularly at the high end of the market.”

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Source: cnbc‍