What’s Shaping the Value-Add Opportunity in European Real Estate?
While investing in European real estate still poses challenges, attractive value opportunities are emerging as we approach a cyclical bottom.
High prolonged inflation and interest rates have caused a steep decline in European real estate values. The current pall over the asset class is beginning to clear, enhancing its long-term attractiveness at a favorable market entry point. A compelling opportunity is available today for value-add investors. In particular, we believe there are a number of cyclical and structural forces that will drive occupier and capital demand, and therefore growth, in the short- to medium-term.
Cyclical Themes
The unwinding of more than a decade of low interest rates acted as a harsh reminder of the cyclicality of European real estate, with transaction volumes dropping over 60% from their 2021 peak (Figure 1). The trough of the property cycle is here, and the pace of valuation decline is expected to continue but at a much reduced rate. A peak to trough correction of about 20% looks likely.1 Significantly, where sellers are stressed and perhaps unable to refinance, opportunities for even greater discounts may emerge—in some cases, 40% off peak pricing could be possible.2
Figure 1: European Real Estate Capital Flows
Source: Real Capital Analytics/MSCI. As of September 30, 2023.
- Source: Real Capital Analytics/MSCI. As of September 30, 2023.
- Source: Barings Real Estate Research. As of December 31, 2023.
