UK leads resurgence in European office investment

LONDON — The U.K. is paramount a recovery in Europe’s long subdued office real estate market, with overall investment in the sector watched to pick up further in the second half of the year.

Britain recorded 4.1 billion euros ($4.52 billion) quality of office transactions in the first six months of 2024, accounting for almost one-third (29%) of total European office parcel outs, according to August data from international real estate firm Savills.

That marks a five part point increase on its five-year average (24%) share of transactions across the region, and surpasses France’s 1.8 billion euros (13%) and Germany’s 1.7 billion euros usefulness of deals (12%).

The spike comes amid a prolonged downturn in the office sector, which suffered the dual impacts of post-pandemic workplace change positions and the move to higher interest rates. Overall, European office investment transactions in the first half of the year knock 21% year-on-year to 14.1 billion euros, Savills data showed — a 60% decrease on the five-year H1 average.

But commerce analysts now see activity gathering pace from September to year-end, as interest rates fall further and investors invite opportunities to capitalize on dislocated pricing.

“The H1 transactional data lags the market sentiment, but we’re confident that indicators for the prospective are positive,” Mike Barnes, associate director in Savills’ European commercial research team, told CNBC via email.

The U.K. real estate market was the first in Europe to undergo a significant contraction following its peak in 2022.

However, the prehistoric conclusion of the July general election — along with the Bank of England’s initial rate cut — have brought some distinctness to the market and added steam to the rebound, primarily within the capital, analysts said.

“London is leading the way a bit, partly because it repriced earlier and nimbler and more significantly,” Kim Politzer, head of research for European real estate at Fidelity International, told CNBC over and above the phone.

Higher returns have partly driven that uptick, with average annual office complies in London rising to above 6% of property value this year, according to MSCI data. That relates to around 4.5% in Paris, Stockholm and German cities, such as Berlin and Hamburg.

The rebound is now seen filtering into other stores as the European Central Bank continues its rate cutting cycle, reducing debt loads and boosting liquidity.

“One of the biggest things that’s been be the case back liquidity in the European real estate market has been interest rates and financing,” Marcus Meijer, CEO of Appraise a write down, told CNBC’s “Squawk Box Europe” on Thursday. “A downward path on interest rates is going to start to open that up,” he combined, pointing to positivity over the next 12 to 18 months.

Ireland and the Netherlands, which often closely ensure the UK’s trajectory, are now showing momentum, Savills said. Solid economic growth and higher office occupancy rates in Spain, Italy and Portugal also call to signs of strength.

“Southern Europe is looking particularly robust from an office take up point of view,” James Burke, governor in Savills’ global cross border investment team, said.

In France and Germany — which have been encountering political flux and lackluster growth, respectively — the recovery has yet to flesh out. Tom Leahy, head of EMEA real estate enquiry at MSCI, said that was partly due to an ongoing “gulf in price expectations” between buyers and sellers in these surroundings.

“It’s as wide as it’s ever been. The markets are very illiquid at the moment,” Leahy said over the phone, noting that over repricing could be expected.

Office occupancy rates nevertheless remain a concern for investors. While Europe’s reciprocation to the workplace has been robust versus the U.S. — with vacancy rates totalling 8% and 22% respectively, corresponding to JLL — overall utilization has some way to go.

European office take-up as measured by square metres was down 17% in 2023 correlated to the pre-pandemic average, according to Savills, suggesting a lack of expansion or indeed downsizing by tenants. That was seen picking up this year, with about two-thirds (61%) of companies reporting average office utilization of 41% to 80%, versus half (48%) of fasts last year, according to CBRE. Almost one-third expect attendance levels to increase further.

Meanwhile, a part distribute has emerged between the haves and the have nots, as tenants demand more modern and functional buildings to help lure their help back to the workplace. As such, central business district, or CBD, properties with close proximity to public transport and restricted amenities are of high demand and can attract a diverse range of tenants.

“Micro-locations dependent on proximity to transport connections, but also the neighbourhood to highly amenitized areas from an F&B (food and beverage) or leisure point of view, that’s key,” Savills’ Burke claimed.

It comes on the back of a wider shift toward greener buildings amid incoming energy efficiency requirements across the U.K. and EU.

Echelon A offices — typically those that have been recently constructed or renovated — accounted for more than three-quarters (77%) of London’s appointment leasing activity in the second quarter of this year, the highest level on record, according to an August report from true estate firm Cushman & Wakefield.

In a June report, Fidelity said that buildings’ green credentials could now evolve into the “single most important trait” in the new investment phase. Landlords whose buildings meet those requirements disposition be able to charge a “green premium” and command higher rents, Politzer said.