Real estate investment will fall by 50 % to 9,000 million in 2023.

Investment in real estate in 2023 will reach its lowest level in a decade. The European Central Bank's (ECB) interest rate hike to 4.25% has significantly deterred real estate purchases such as hotels, residential rental properties, shopping centers and logistics facilities. Consultancy firm Colliers, according to a forecast for Cinco Días, predicts that investment by the end of the year will be between 9 and 10 billion euros, corresponding to a drop of up to 50% compared to 2022, which was the second most fruitful year on record after 2018.

Alberto Diaz, director of capital markets at Colliers

After a first quarter of 2023 characterized by ample investment, the second quarter of the year marked a significant slowdown in activity. Transactions totaled €2.988 billion from January to March, and fell to €2.161 billion from April to June. On a year-on-year basis, there is already a significant slowdown of 49.6% for the half year, down to €5.150 billion.

Dias points out that activity is expected to pick up in the second half of 2023 and early 2024, supported by ample market liquidity and the end of interest rate hikes, which will bolster investor and owner confidence, bringing their price and yield positions closer together. "We believe the worst of the market will be left behind after the second half of 2023," he adds.

Julian Bravo, responsible for real estate at ING Spain and Portugal

The rise in interest rates "will continue to put pressure on buying and slow demand" in 2023.

Higher interest rates have increased the cost of financing projects, so potential buyers are demanding lower prices (hence higher yields) for assets, which sellers are generally not willing to accept. This disagreement in asset valuations also makes it difficult to do deals.

It is also difficult to make calculations for buyers until it is known by what percentage interest rates will settle. "Our forecasts suggest that interest rate hikes by the ECB will continue, albeit at a more moderate pace compared to expectations a few months ago," notes ING's Bravo.

The decline in prices

In addition, experts note another problem for the Spanish market - it is a price adjustment. There is a belief in the industry that the Spanish market is slowly adapting to the decline in real estate valuations compared to markets such as the UK and the US, which are quick to take into account the fall in valuations and thus facilitate a resurgence in transactions.

"Investment activity is expected to improve in the second half of the year compared to the second quarter," states Diaz of Colliers. "Although there is plenty of liquidity in the market, many investors are waiting for the market to stabilize, and others who want to invest now are demanding much higher yields in their deals, 150-200 basis points higher than a year ago, which owners are still not willing to accept," he adds.

Manuel Ibáñez, director of real estate at DWS (a management company affiliated with Deutsche Bank)

He notes that investment activity is at its lowest point in a decade. "We believe prime real estate prices will hit a low in the second half of this year, with growth resuming across all sectors from 2024," he predicts.

"Overall, we are seeing interest from investors, but buying decisions are being made with caution," admits Bravo, who says investors are still waiting for a more favorable and stable economic environment with less volatility in both yields and market values of assets. "However, this decline in yields is still not fully reflected in prices. The trend is predicted to change and the number of transactions will increase over the next six to twelve months," he says. Ibáñez believes that real estate prices may have fallen by 15-20%.

The Colliers expert also cites other reasons for the slowdown in investment, such as two consecutive Spanish elections - municipal and autonomous in May and national in July; rising government bond yields; rising construction costs; uncertainty about the geopolitical and economic consequences of the Russian intervention in Ukraine; a still high core consumer price index and a possible decline in savings and consumption, which could affect companies' financial results.

Interest in hotels, logistics and alternative assets

"Investors are showing interest in city and resort hotels," says Alberto Diaz of Colliers, due to the good dynamics in the tourism sector. In fact, this segment was the most active in the first half of the year with a transaction volume of €1.382 billion (still 15.9% less than a year earlier).

Alternative assets. The Colliers expert also notes that investors are showing interest in so-called alternative assets, such as student dormitories, retirement homes and infrastructure such as data centers. "We expect the recovery to be led by residential real estate and logistics," says Manuel Ibáñez of DWS. "Not only have these sectors notably increased their profitability, but they continue to have some of the most robust employment figures," he points out. For example, the rental housing market was the second most invested market by June, with an amount of 1.258 billion euros.

The office segment, previously the most important for investment, remains at a low level. It is not popular with investors after the proliferation of remote working, especially for properties located in secondary neighborhoods. "A strong polarization between prime and secondary assets is forecast," argues Julian Bravo of ING.