Stay up to date with free updates
Simply sign up to the myFT Digest of Real Estate and have it delivered straight to your inbox.
European commercial property transactions fell to a 13-year low at the start of 2024 as hopes of interest rate cuts in the near future faded and the property market remained sluggish for a long time.
MSCI data released on Thursday showed first-quarter transaction volume was 34.5 billion euros, down 26 percent from an already sluggish period last year and the seventh consecutive quarter of declines, with office building transactions marking the smallest quarter on record.
The commercial real estate market has been hit by a severe correction due to a significant increase in interest rates, causing property values to plummet and financing costs to increase in markets that rely heavily on debt to fund transactions.
“After a very weak 2023, there was hope that European real estate investment would start to recover in the first quarter of 2024,” said Tom Leahy, head of EMEA real assets research at MSCI.
“But the ongoing, and sometimes painful, realignment towards the end of historically low interest rates means the market remains a tricky place to trade.”
The report follows U.S. data last week showing first-quarter trading volumes fell 16% compared to the same period last year.
European office property prices are down about 37% on average from their 2022 peak, according to Green Street research. Residential and industrial property prices are down by about a fifth.
While debt pressures have forced some owners to sell, many property owners are reluctant to lock in losses at what they believe could be the market bottom.
Wealthy investors who can buy without debt have driven much of the recent activity, but it has generally been limited to smaller deals.
MSCI said London was “by far” the number one investment destination despite the decline in trading volumes, as investors are returning to the market in search of bargains as prices correct faster in Britain than elsewhere in Europe.
Two high-profile office deals collapsed this quarter – the £240m sale of 20 Old Bailey and the receiver-brokered £110m sale of 5 Churchill Place in Canary Wharf – but some in the market interpreted this as a sign that sellers are hoping prices can rise after the Bank of England cuts borrowing costs.
“Statistically the first quarter was pretty dismal,” said Nick Braybrook, head of London capital markets at Knight Frank. “But really, that's not a reflection of what's going on outside. It feels quite different.” He said private equity groups are starting to follow family offices into the market, and he expects to see more deals over the next six months.
MSCI estimates that the prices sellers are willing to pay are still often lower than what buyers are willing to accept. “Many areas of the market have not seen sufficient repricing to stimulate buyer interest,” MSCI said.
The hotel industry was the only one to see an increase in deal volume, as the sector has benefited from the post-COVID-19 revival of travel and is seeing a rise in transaction activity.