European real estate market outlook for 2024: an industry overview.

Let's take a look at the assets that will attract the most attention in Europe and Spain in 2024, especially in the real estate market. The European real estate market is going through a difficult phase due to rising interest rates, which is reducing real estate investments (reaching ten-year lows) and asset prices, although returns are still high. BNP Paribas RE has prepared a forecast for 2024 for the European real estate market, analyzing which assets in Europe and Spain will attract attention in 2024, with a focus on the residential real estate market.

Decline in the housing market in 2023

According to analysts at BNP Paribas RE, due to the macroeconomic situation, the recovery in the real estate market may not start until 2024 at the earliest, when investors will adopt new strategies given the more stable macro-financial environment.

Investment in Europe has reached its lowest level in a decade at €182.6 billion in the first half of 2023, 57% less than in the first half of 2022. Of the five largest markets, Spain ranks fourth with €3.8 billion (-41%), behind the UK, which leads with €21.3 billion (-52% year-on-year), Germany with €9.8 billion (-68%) and France with €7.8 billion (-42%). Italy is the only country behind Spain with €2.1 billion (-62%). While the decline in investment may seem steeper than during the 2008 financial crisis (-71%), it is also expected to be more modest overall, with a decline of 42% by the end of 2023.

Stagnation of European real estate prices in 2023

The reason for this trend is the stagnation of real estate prices rather than the decrease in liquidity that was experienced in 2008. The market dynamics are also different from previous major recessions in many aspects, as both sellers and buyers have withdrawn from the market.

• First, many buyers don't want to close deals at rising financing costs. They also realize that most asset types don't have the same capabilities as 2022: state-of-the-art offices, luxury and high-performance retail stores and logistics.
• They share this sentiment with sellers, who have little motivation to sell good properties at lower prices as long as occupancy remains stable (albeit selectively). Fewer owners are having difficulty obtaining credit compared to 2008, making it easier to adopt a wait-and-see attitude.

The return of the real estate sector in 2023

According to analysts at BNP Paribas RE, we are in a slowdown phase, mainly for the premium segment; a broader recovery will begin in 2024. Currently, average premium returns in the 16 largest European markets are 3.9% for retail stores and 4.4% for logistics: these values are five and ninety points higher than in the same period last year, respectively. The average premium yield is 4.3% (+110 points) for offices.

According to the study, incomes are likely to continue to increase in 2023 and stabilize in 2024.

The market will then revive selectively by asset type and geography, led by countries that have seen the sharpest growth. According to BNP Paribas RE, logistics (currently highly valued) and the residential segment will lead the market, both supported by prospects for strong rental growth.

The rental market in Europe

The prospects for rental price growth remain at the center of the upcoming investment stratification. Indeed, rental price increases are expected only in sectors that have performed well over the past five years, such as offices and logistics, while retail may begin to recover, and the growth of the residential real estate market should be stable.

Market forecast for residential real estate in 2024

The tightening of financial conditions and uncertainty regarding the end of the interest rate cycle led to a 62% decrease in residential real estate investments in Europe in the first half of 2023 compared to the first half of 2022, and it is 55% below the five-year average.

Spain has become the only country where investment has increased during this period. In the Scandinavian countries, Germany, and France, investment volumes have fallen more sharply than the European average, while the situation in the Netherlands and the UK has been better. Rising mortgage interest rates and government bond yields are testing the investment market, reducing risk and adjusted returns from real estate.

To resume transactions, prices must adapt to the real economic and monetary environment. Refinancing is a major risk that may force some investors to sell in the short term due to price adjustments and, consequently, an increase in the Loan-to-Value ratio. However, investors remain very interested in residential assets due to the significantly increased demand in the rental housing sector, driven by worsening affordability amid rising mortgage rates and home prices. Additionally, major cities are facing a serious housing shortage and obsolescence, while the formation of new households is expected to continue growing in the medium term.

Housing prices in Europe

The volume of real estate transactions in Europe in the first quarter of 2023 decreased by 10.7% compared to the previous year. Home prices on the continent fell for the second consecutive time during this period, specifically by -0.7% after a -1.4% drop in the fourth quarter of 2022. Over the last six months, housing prices in Europe have decreased by -2.1%. The hardest-hit countries are Germany (-7.8%), Luxembourg (-5.6%), Finland (-5.2%), Sweden (-4.4%), and Denmark (-4.0%), which have experienced a more significant decline than the maximum over the past two years.

Housing prices are falling in Europe... but not everywhere...

• According to our accessibility report, all markets (except forRome and Brussels) are significantly overvalued. As a result, housing prices are decreasing in 20 out of 28 cities, reaching a peak over the last two years. Housing prices have dropped by more than 10% in Frankfurt (-16.2%), Copenhagen (-12.7%), Amsterdam (-12.7%), Brussels (-10.4%), and Munich (-10.1%). Southern European cities like Vienna and Warsaw are the most resilient, as housing prices have not yet decreased and continue to rise. However, this trend may change by the end of the year.

The rental housing market in Europe

Changes in financial conditions affecting households have contributed to an increase in demand for rental housing in major cities. Rent growth reached +8.2% year-on-year in Europe in the first quarter of 2022 - the highest average annual increase since 2010. The imbalance between supply and demand in the rental sector is significant due to uncertainty in housing regulations, which has led to a sharp reduction in supply in the rental market, for example, in Berlin, Barcelona, and Valencia.

Moreover, limiting rent increases to around 2%-3% to avoid indexing to inflation forces landlords to pass on the loss of income to new contracts. Tenant demand has also shifted towards more energy-efficient housing to avoid rising energy bills. The next challenge may be a ban on renting out energy-inefficient housing, as is already happening in France and the UK. Such regulation will significantly increase pressure on the availability of rental housing.

The rental-to-buy ratio indicator shows that in most markets, renting is the better option for households looking for more space. In Stockholm, London, Munich, Hamburg, Paris, Frankfurt, Lyon, Copenhagen, Prague, and Oslo, renting offers twice the space that a household can afford to buy. Since the beginning of the pandemic, renting has become cheaper than buying in several Southern European markets, including Barcelona, Madrid, Milan, Lisbon, Rome, and Seville.

How much will rent increase in Europe?

It is expected that rental prices will continue to rise due to inflation, the recovery of household incomes, and a lack of supply compared to the demand for rentals. Southern European rental markets are likely to continue developing and recording significant rent increases thanks to improvements in the labor market, expectations of strong income growth, and a high potential depth of the rental market.

Rental payments are expected to continue rising over the next five years, driven by increasing demand for rental housing in light of the economic situation and the reduced ability of households to purchase their own homes. Similarly, the proposed regulatory measures on energy efficiency by the European Commission could have a significant impact. They may reduce the number of available rental properties and improve the supply of rental housing, putting pressure on rental prices. As a result, rents in Spain could increase by 13.5%, ranking second after 18% in the Netherlands and 15.5% in the United Kingdom. This is followed by 10.5% in Italy, 9% in France, and 7% in Germany.

Real estate market forecast for 2024 in other sectors

Offices

The highest degree of uncertainty in the real estate market is observed specifically in this segment, which is undergoing profound changes on several fronts: price adjustments following the largest increase in financing costs in decades, work practices indicating a decline in demand for space, and a regulatory environment that will continue to increase obsolescence. These issues have placed the sector in a period that can be characterized as "suspended animation": alive, but with reduced activity. Price stagnation will be resolved in the first half of 2024, when monetary policy reaches its terminal rate in the current cycle. As for employment, demand remains concentrated on the best properties, continuing the established post-pandemic dynamics that reflect tenants' desire to reduce space and occupy buildings that meet energy standards.

Logistics

The year 2022 saw the largest adjustment in the logistics market due to rising financing costs. Additionally, recovery in this sector is happening much faster this year compared to other segments of real estate. A stable and widespread recovery is expected by the end of the year. The increase in rental prices, which can be quite significant at times, affects tenants unevenly. Investors need to take this into account when leasing out spaces.

Retail

The sector has experienced one of the longest declines in history due to deep structural changes in our shopping habits. The share of retail in European investment operations has significantly decreased over time, and prices have sharply adjusted as a result. The impact has been uneven across this broad sector. The downward cycle seems to have reached its bottom, as evidenced by the limited influence of the current interest rate cycle on prices. Moreover, there is a resurgence in rental prices in some areas. This raises the question of whether the sector now deserves an investment opportunity.

The article was read on (italian idealista/news) European real estate market: forecasts for 2024 sector by sector.