People walk along London Bridge and past the City of London skyline.
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LONDON – The UK is leading the recovery of Europe’s long-sluggish office real estate market, with overall investment in the sector expected to pick up further in the second half of this year.
Figures from international real estate firm Savills for August showed that UK office transactions amounted to €4.1 billion ($4.52 billion) in the first six months of 2024, accounting for almost a third of all European office transactions (29%).
This marks a 5 percentage point increase in the region’s five-year average deal value (24%), surpassing France’s €1.8 billion (13%) and Germany’s €1.7 billion (12%).
The surge comes amid a prolonged slump in the office sector, which has been hit by a combination of post-pandemic workplace shifts and rising interest rates. Savills data shows that overall, European office investment transactions fell by 21% year-on-year in the first half of this year to 14.1 billion euros, a 60% decrease from the five-year average in the first half.
But industry analysts now believe economic activity will pick up pace from September to the end of the year as interest rates fall further and investors seek to take advantage of mispricing.
“First half trading data lagged market sentiment, but we believe indicators are positive going forward,” Mike Barnes, associate director in Savills’ European business research team, told CNBC via email.
Europe’s recovery process fragmented
The UK housing market is the first in Europe to shrink significantly after peaking in 2022.
However, July ended early Analysts said the election and the Bank of England’s first interest rate cut had brought some clarity to markets and added momentum to the rebound, mainly in the capital.
Kim Politzer, head of European real estate research at Fidelity International, told CNBC by phone: “London is kind of leading the way, partly because it’s repricing earlier and more quickly. Faster and more significant.
Rising returns have partly driven the rise, with average annual London office yields rising to more than 6% of property value this year, according to MSCI data. This compares with around 4.5% in Paris, Stockholm and German cities such as Berlin and Hamburg.
That rebound is now filtering through to other markets as the European Central Bank continues its rate-cutting cycle, reducing its debt burden and increasing liquidity.
Modern architecture in the La Défense district of La Défense, Paris, France on July 13, 2024.
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“One of the biggest factors hindering liquidity in the European real estate market is interest rates and financing,” Mark CEO Marcus Meijer told CNBC’s “Squawk Box Europe” Thursday. “ Lower interest rates will start to open things up,” pointing to a positive outlook for the next 12 to 18 months.
Ireland and the Netherlands, which typically follow the UK’s trajectory, are also showing momentum, Savills said. Solid economic growth and higher office occupancy rates in Spain, Italy and Portugal also show signs of strength.
“Southern Europe looks particularly strong from an office occupancy perspective,” said James Burke, director in Savills’ global cross-border investment team.
In France and Germany — which have struggled with political turmoil and sluggish growth, respectively — the recovery has yet to materialize. Tom Leahy, head of real estate research for Europe, the Middle East and Africa at MSCI, said part of the reason was a persistent “price expectations gap” between buyers and sellers in these countries.
“The range is as broad as ever. The market is very illiquid right now,” Leahy said on the call, noting that further repricing could be expected.
Leasing availability issues
Still, office occupancy remains a concern for investors. Europe’s return to work strong compared to U.S. – total vacancy rates 8% and 22% According to JLL, overall utilization still has some way to go.
European office occupancy (in square metres) down 17% Savills said this compared to pre-pandemic averages through 2023, indicating a lack of expansion or actual downsizing by tenants. This year the situation has picked up, nearly two-thirds According to CBRE, 61% of companies reported average office utilization rates of 41% to 80%, compared with 48% last year. Nearly a third expect attendance to increase further.
At the same time, a divide emerged between haves and have-nots, as tenants demanded more modern, functional buildings to attract employees back to their workplaces. As a result, properties in the central business district (CBD), close to public transport and local amenities are in high demand and can attract a variety of tenants.
Micro location depends on proximity to transport links, but proximity to high amenity areas from a dining or leisure perspective is also key.
James Burke
Global Cross-Border Investment Director, Savills
Savills’ Burke said: “Micro-locations rely not only on proximity to transport links, but also proximity to highly amenity areas from a dining or leisure perspective, which is key.
Against this background, the UK and EU continue to put forward energy efficiency requirements and there is a widespread shift towards green buildings.
Grade A offices – typically those that have been recently built or refurbished – accounted for more than three quarters (77%) of London office leasing activity in the second quarter of this year, the highest level on record, according to one agency. August report from real estate firm Cushman & Wakefield.
in a June reportFidelity said a building’s green credentials may now become the “most important feature” of the new investment phase. Landlords whose buildings meet these requirements will be able to charge a “green premium” and receive higher rents, Politzer said.
“Those Class A green buildings are in short supply and are usually leased during development or renovation,” she said.
Politzer said this could spur investment in green real estate by “opportunistic players” and those that fail to upgrade could face further pressure. At the same time, the lack of new development is expected to drive further growth in high-quality office towers in the coming years.
“Looking ahead, the limited development pipeline suggests that fewer new office spaces will be entering the market. This should lead to a gradual decline in overall and Class A vacancy rates over the coming year and drive rental growth, particularly at the high end of the market. Cushman & Wakefield ( Andy Tyler, head of London office leasing at Cushman & Wakefield, said in the report.
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