Debt woes throttle European commercial property market
Office transactions slide to lowest level since 2009 in third quarter
European office deals slumped to their lowest level since the depths of the financial crisis during the third quarter, as soaring bond yields and the start of a new cycle of central bank rate rises choked off hopes for a recovery in valuations.
The value of office transactions fell by a third compared with a year earlier to €8.8bn, according to data from MSCI. That was the lowest figure since the third quarter of 2009, when property valuations were at their post-crisis nadir.
“The third quarter has been one of the slower periods for European property on record,” said Tom Leahy of MSCI.
Mark Swetman, chief executive of London real estate developer LS Estates, said despite strong rental growth prospects for the best office space, investors were “risk-off”, concerned about the viability of projects amid growing inflation costs and contractor and subcontractor insolvencies.
“Everyone’s been hitting time delays and cost inflation,” he said. “There’s not one scheme that’s finishing in the right quarter; some are over a year late. It’s a big issue.”
Office sales that were expected to be under way by now have been pulled from the market, agents said. Meanwhile, investors have been angling to recut deals across all sectors in light of increasing borrowing costs, the FT has reported.
MSCI data showed dealmaking fell across all types of commercial property except retirement housing, with the volume of transactions overall at its lowest level since 2023 at €43bn. Excluding the third quarter of 2023, property dealmaking sank to its lowest level since 2013, the index provider said.
Although demand for prime sites has remained strong, the commercial property market has been subdued since central banks implemented a rapid series of interest rate rises in 2022, increasing the cost of financing and hitting valuations.
The start of a new cycle of rate increases in recent months to curb inflation sparked by war in the Middle East has cooled the market further.
“The surge in bond yields has had a notable impact on dealmaking, introducing another layer of pricing uncertainty to a market that is struggling to adapt to a rapidly changing geopolitical and macroeconomic environment,” Leahy said. Bond yields rise as prices fall.
The UK commercial property market was relatively resilient, with demand for industrial sites and apartments helping limit the decline to just over 10 per cent.
Slowdowns in France and Germany were far more pronounced, however, with volumes down by close to half compared with the same time last year.
French borrowing costs have surged since the start of the year, as protests over the cost of living and political tensions ahead of presidential elections next year have stoked fears about the country’s willingness to tackle its debt pile.
Leahy said there was a possibility that property owners who had held off selling assets in the hope of a recovery to pre-2022 valuations would now decide to take their marks and price them “at a level at which they believe will sell, rather than might sell”. But the market still faced “significant headwinds”, he added.