European real estate outlook 2023

The European real estate outlook is brought to you by our regional experts analysing the latest news, trends, risks and opportunities in each region.

Last updated: 31/05/2023

Pan-European overview

Judith Fischer, associate, commercial research 

As inflationary pressures will likely persist in the near term, the European Central Bank is expected to raise interest rates further until mid-2023 before potentially cutting rates from 2024 if economic activity slows. Tighter lending criteria will contribute to the polarisation of performance in commercial real estate (CRE) between the best and the rest.

Private capital, safe haven investors, the ability to secure debt refinancing and those looking for opportunity are likely to help support the pricing of best-in-class real estate. We could see more of a repricing for secondary and tertiary real estate, especially where it is harder to secure leverage. This could provide opportunity for assets with ‘good bones’ to reprice to the extent that it becomes more economical to refurbish, reposition or repurpose.

The focus is likely to be on smaller, individual sub-€100million deals. There may also be equity and JV opportunities that become apparent in order to provide refinancing solutions following an increase in the cost of debt.

It is expected we will see an increase of equity real estate funds raised for core-plus or value-add returns switch into the debt space as returns become increasingly accretive with a lower associated risk profile.

The living sectors will see increased interest, including the counter-cyclical student and affordable housing sectors, with markets such as Spain and the UK expected to see attractive growth. In areas with an ageing population, demand for senior housing will continue to grow. Counter-cyclical discounters and lower beta food stores are also expected to continue to hold demand.

Source: Knight Frank Research

Austria

Martin Denner, Otto Immobilien (Knight Frank research partner)

Investors with sufficient capital and private investors who can seize opportunities on a case-by-case basis are well-positioned to take advantage of the current environment. The solid occupier markets for high-quality offices, modern logistics space and residential properties are expected to partially compensate for the declines in values.

With the second quarter of the year well underway, economic expectations for Austria have been adjusted to an overall growth of the economy in 2023 of 0.5%. Stricter credit provisions are expected to drag on economic performance and the investment market.

Most of the transactions currently taking place in the Viennese market are for well-located but somewhat older office properties that are able to offer a yield, which in turn provides accretive financing solutions even in the current interest rate environment.

Although there have been no forced sales or restructurings to date, pressure is expected to increase across all asset classes due to the changed market and interest rate environment, particularly as a result of expiring financing.

However, investors with clear objectives and sufficient capital have attractive opportunities. The positive lettings markets, increased demand and rising rents in particularly high-quality offices, modern logistics space and residential properties are expected to compensate partially for the declines in values. The price expectations of buyers and sellers are expected to converge in the coming months.

Private investors in particular, who comprised a large proportion of the buyer pool in the past six months, are well-positioned to take advantage of interesting opportunities. Unlike institutional investors, they do not tend to have predefined investment criteria, and instead can examine and seize opportunities on a case-by-case basis. They are also more flexible in terms of interest rate hedging, with less of a reliance on financing as a part of the deal structure.

Sources: Oxford Economics, Otto Immobilien

Belgium

Shane O’Neill, head of research, Knight Frank Belgium

Cash-rich investors should have the upper hand in the current environment, while opportunistic off-market investment deals should play a key role this year. Assets related to logistics, light industrial, and life sciences activities remain highly sought after.

The Belgian economy has avoided a recession, with encouraging business confidence indicators and improving employment statistics providing strong fundamentals for market recovery while inflation slows down.

As a result of the flight to energy-efficient buildings by large occupiers, the office market is transforming into a two-tier market. The Grade A market is a landlord market with rental premia being paid on buildings which are compliant with all aspects of ESG - especially so if they have the market standard certifications to show for it. This means that other CBD districts will keep edging closer to Brussels’ prime rent of €340/sq m/year, historically only found in the European district. At the other end of the spectrum, owners of Grade C offices may have to offer significant discounts on their rents given the higher charges attached to occupying inefficient premises.

Meanwhile, demand remains healthy in logistics, with the main hurdle being the lack of tradeable supply in the market. Indeed, large-scale projects are mainly only feasible in areas where large plots are still available. Additionally, we should see more brownfield conversions in the most sought-after locations. Upward pressure on rents is a reality and will manifest over the coming months - the logistics prime rent in Q1 was €65/sq m/year.

Regarding the investment market, the higher cost of capital remains a concern, swap rates remain volatile, and therefore cash-rich investors have the upper hand as the market emerges from a “price discovery” phase, providing they are able to identify willing sellers. Indeed, the investment pipeline is currently weak, especially where offices are concerned. Opportunistic off-market investment deals should play a key role this year. Assets related to logistics, semi-industrial, and life science activities remain highly sought after, and it is reasonable to assume investment volumes will increase in H2, taking into account that H1 was quite underwhelming in this regard.

Sources: National Bank of Belgium, European Commission, Federal Planning Bureau, Statbel, Knight Frank Research

Czech Republic

Ondřej Vlk, head of research and consultancy, Czech Republic 

A limited supply pipeline may drive rental growth in the Prague office occupier market in the next few years. The investment market is characterised by a lack of prime properties, with yields not having shifted in line with rising financing costs. Investors will therefore likely focus on assets with redevelopment or repurposing potential.

Economic growth is expected to remain weak for the rest of the year, but inflation continues to ease, while the labour market remains tight.

The Prague office market is expected to experience a period of limited completions as there have been no new commencements in the city for the past three quarters. The pipeline for construction scheduled for Q2-Q4 2023 is at 90,000 sq m, and for 2024 it is even lower at 50,000 sq m, with no new completions currently in sight beyond that.

This situation may result in an undersupply in 2024-2025, leading to renewed rental growth, which had already been increasing throughout 2022 due to higher construction costs. However, the occupier market may see an influx of second-hand office space that is now obsolete as current leases expire.

Signals from the market suggest that IT sector occupiers may renegotiate with significantly lower space requirements, which could release a substantial amount of accommodation to the market. While this could to some extent mitigate the complete lack of new supply in the coming years, it will not be a complete substitute.

The recurring issue in the investment landscape is the lack of prime properties available for sale, which is further emphasised by the limited pipeline. Although it is possible that some newly completed properties will enter the market for sale, the restricted pipeline means that overall investment volumes will fall short of previous years' results.

Another challenge faced by the market is the yield shift, which has not kept up with the increase in financing costs. As a result, potential investors are primarily focusing on properties with development or repurposing potential. This also means that interested parties typically come from a local pool of investors or are larger international developers operating in the industrial and logistics sector who are actively seeking opportunities to expand and improve their portfolios.

Despite the slowdown in the inflation rate, it is unlikely that financing costs will change in the short term. On the contrary, the Czech National Bank has maintained the base interest rates at the current 7% with a close vote, as three out of the seven committee members voted for a further increase. This would only further restrict financing options, limiting transactional activity.

Sources: Oxford Economics, Knight Frank Research

France

David Bourla, chief economist and head of research, France

The French property market will remain below its long-term performance in 2023. While a rapid recovery is unlikely, activity may begin to pick up in the second half of the year with opportunities available for equity-rich investors.

The French economy is expected to see a marked slowdown in 2023 with limited growth of 0.6% followed by a slight uptick in 2024 (+1.2%) and 2025 (+1.7%). The unemployment rate is likely to increase to 7.5% at the end of 2023 and will continue its upward trend in 2024 before stabilising in 2025. Nevertheless, hiring intentions remain high and the executive employment market could even set a new record.

This will help support the Paris office lettings market especially in the Central Business District (CBD). While still benefiting from strong occupier demand in sectors such as finance, advisory or luxury, the CBD will continue to attract companies from other submarkets in the coming months. Supply is already very limited and will become even more scarce, which will encourage a further increase in rental values.

In contrast, supply is expected to continue to increase in most suburban markets, raising the vacancy rate in certain office areas to very high levels and leading to landlords offering more generous incentives.

The outlook is also mixed for the retail lettings market. Purchasing power and household consumption will likely stagnate in 2023 before rising again in 2024. The uncertain economic climate will encourage retailers to further streamline their network, thereby increasing vacancy rates in secondary locations.

On the other hand, retail parks are holding up well, as are the main Parisian high streets which will continue to benefit from strong international tourism and the upcoming 2024 Olympic Games. Finally, many retailers still have major expansion plans and the number of new foreign retailers expected in 2023 is likely to be high, confirming the strong appeal of the French retail market.

Following the sharp decline in investment activity at the end of 2022 and Q1 2023, a full recovery is unlikely to happen in 2023. While there is still a strong interest in alternative assets, such as data centres, managed residential, and higher education property, large offices in the Paris suburbs are often withdrawn from the market or disposals are put on hold. However, a modest rebound in investment volumes is still possible in the second half of 2023; that is, if the international banking and geopolitical situation does not deteriorate further, liquidity does not dry up and monetary policies are eased.

Sources: INSEE, Banque de France, Knight Frank Research

Germany

Jutta Rehfeld, director, Berlin, Germany

Dennis Beißer, senior research consultant, Munich, Germany 

Germany is considered a main destination for cross-border capital after the US and UK, although investment volumes are expected to remain at a lower level than in the previous years. Drawn-out price discovery continues to slow down investment decisions.

As Germany comes from a particularly low-yield level, there is a need to overcome the gap and for sellers to accept higher price discounts. At the same time, the market is being driven by regulatory pressure to make real estate portfolios climate neutral.

Falling energy prices due to greater security of energy supply and easing supply chain issues will likely continue to dampen headline inflation. Meanwhile, the shortage of skilled workers has worsened and could weigh on the German economy in the medium-term.

While the mood among German companies has improved over the last six months, the Ifo Business Climate Index fell in May due to dampened future expectations. The economy is projected to marginally grow by 0.1% in 2023, while growth is expected to pick up to 0.9% in 2024.

With a slight delay, the economic uncertainty has started to impact leasing markets. While demand for inner-city locations remains strong with rents rising, activity in secondary locations in particular is more subdued. Amid slightly increasing vacancy rates and a growing share of sublease opportunities, the flight to quality continues, especially with regards to sustainability credentials.

As investment activity has fallen, particularly institutional players are examining the ESG compliance within their portfolios, and evaluating possibilities to adjust towards meeting regulatory requirements. The financing environment is currently favouring new construction over conversions of existing buildings, with reduction of ‘grey energy’ – the total amount of energy used, seen as a priority. Opportunities continue to exist in value-add products in addition to the existing demand for core.

Transactions across all segments are currently struggling with pricing conditions. Therefore, investors might be increasingly focused on residential assets including niche subsectors, such as student housing or senior living. According to our Capital Gravity forecast model, cross border investments will mainly come from the US and European neighbours. Furthermore, it is likely that there will be interest from Asian capital to invest in German key markets.

A possible end of the price discovery phase is closely linked to the ECB’s monetary policy rate cycle. As long as interest rates haven’t reached their peak yet, many investors are likely to take a wait-and-see approach. This is putting downward pressure on prices, particularly in the key markets, such as Berlin and Munich, where yields have been at a historically low level.

Sources: Oxford Economics, Ifo Institute, Knight Frank Research

Ireland

Joan Henry, chief economist & head of research, Ireland

At a time of strong economic activity in Ireland, global banking concerns are adding a layer of caution to office occupier and investor decision making and this is expected to remain a drag on activity throughout 2023.

Ireland’s economy continues to outperform and there are a record number of people in employment (almost 285,000 more than at the end of 2019).

Occupiers looking for larger spaces are currently taking a more cautious approach as they assess their requirements and budgets against a wider range of criteria, particularly financial.

This comes at a time when the market is experiencing an increase in space due to both new completions and space available to sub-let in prime city centre locations.

Combined, these factors will result in some downward pressure on rents. Ending the last quarter at €70 psf for the best space in the city, rents are expected to move down to mid-€60 psf by mid-year.

After that, enhanced incentives and rent-free terms are expected to keep a floor on rents as developer/landlord costs to meet the required sustainable credentials, balance the rental equation.

Occupiers are however, expected to remain increasingly discerning about their space requirements, continuing to take their lead from two key drivers – sustainable credentials (particularly energy related) and employee requirements. Larger transactions in 2023 will be driven by a number of requirements in the Professional Services sector.

2023 is set to be an anomaly given the spike in amount of space available to sub-let, particularly since the middle of 2022. This increase has been driven almost entirely by tech companies adjusting cost overheads, including minimising potential capital expenditure budgets, in response to stock market fluctuations.

Occupiers ready to act this year will have a greater selection of new space to choose from in the city centre than has been the case for some time.

Beyond 2023, the delivery pipeline contracts. Some projects have been put on hold while others are facing more complex funding processes.

Investment activity in Q1, particularly for office assets, reflects the ongoing multiple challenges being faced by the sector globally, with higher funding costs and nervousness regarding the systemic risk to the global financial system expected to weigh on the sector for at least the next two quarters.

A lack of prime office assets on the market is also hampering activity. Prime yields continue to come under pressure, with further outward movement expected as the year progresses.

Sources: Knight Frank Research

Netherlands

Judith Fischer, associate, commercial research, London

Transaction volumes will likely pick back up towards the end of 2023, especially in the office and logistics sectors.

The Dutch economy is expected to expand by 1.6% this year, as consumer spending has remained resilient, following the fall in headline inflation. However, higher interest rates, tighter lending standards, and weak foreign demand are weighing on the outlook.

Activity in the office leasing market will likely remain stable but there is more space available to sub-let. Landlords continue to improve their assets as ESG credentials are becoming ever more important. Office buildings require a minimum EPC rating of C according to legislation that came into force at the beginning of the year. Professional landlords typically aim for higher ratings.

The flight to quality and an emphasis on centrally located assets is underway, so city centres in Amsterdam, The Hague and Rotterdam are forecasted to see demand.

Yields have continued to move out. As interest rates are expected to stabilise from the second half of the year, the pricing discovery phase is likely to come to an end and transactions volumes are expected to pick back up.

As a European logistics hotspot, investment opportunities in the region are especially pronounced for multi-modal facilities that are well connected to international distribution networks.

Sources: Oxford Economics, Knight Frank Research

Poland

Elzbieta Czerpak, head of research, Poland

Despite challenges facing the manufacturing and production sectors, demand for warehouse and logistics assets is predicted to remain high. Further growth of established logistics hubs will continue, but increased attention will be directed towards Poland’s emerging logistics markets thanks to improvements in road infrastructure and better availability of labour.

The Polish economy is expected to contract this year despite falling inflation. Consumer confidence and private consumption will remain relatively subdued, while investment growth will weaken.

Strong developer activity in the office sector in recent years has resulted in a robust new supply pipeline of deliveries for upcoming quarters, which is likely to increase vacancy rates in certain regional markets.

However, some decisions to commence new construction are being postponed amid rising financing and construction costs, which could result in a supply gap a few years in the future.

These rising costs will drive asking rents especially in new builds, and service charges are also likely to climb with mounting service and utility costs.

Current market conditions will limit the number of industrial projects built on a speculative basis, and current under construction supply is dominated by Built-To-Suit schemes secured with long-term lease agreements. As with the office sector, rental rates are expected to increase in 2023.

Despite the reduced investment activity in the past months, the number of transactions is expected to increase in the second half of 2023 due to the projected stabilisation of interest rates, while pending transactions are being negotiated at higher yields. The warehouse sector remains the most popular choice for investors.

Sources: Oxford Economics, Knight Frank Research

Romania

Ileana Stanciu - Necea, head of research, Romania

In 2023, top-performing office and industrial assets will likely continue to be highly sought after.

The outlook for 2023 is less optimistic as tighter financial and credit conditions may weigh on activity, following strong GDP growth in 2022. The Romanian economy is projected to increase by 2.9% in 2023 and 3.7% in 2024, as the implementation of EU programs will likely support post-pandemic investment.

The monetary policy rate is expected to have peaked at 7.0% if inflation subsides in the coming quarters, with potential rate cuts in 2024-25. The pace of consumer price increases is forecasted to slow to 9.3% in 2023 and 4.5% in 2024.

The Information Technology & Communications sectors are expected to remain active in the office leasing market due to favourable workforce availability and affordability of specialised talent. Inflationary pressures have, however, created a challenging environment for relocations and expansions, due to increasing costs of utilities and fit-outs which may weigh on leasing activity.

Amid a lack of approvals for new building permits, low levels of new supply in the pipeline are likely to drive prime headline rents upwards in the next 6-12 months following the growth trajectory in 2022.

Construction of new product across all sectors remains challenging due to increasing costs, difficulties sourcing materials, and other supply chain disruptions.

Sources: Oxford Economics, INS (National Institute of Statistics), Knight Frank Research

Spain

Rosa URIOL, deputy head of valuations & head of research, Spain

There will likely be ongoing investor demand for offices and hotels, particularly in the main cities Madrid and Barcelona. The PRS sector will benefit from high demand and a lack of supply which continues to attract investors.

The outlook for the Spanish economy has improved, with GDP expected to expand at the fastest pace within the Eurozone, both this year and the following. Estimated growth will be 1.5% in 2023 and 2% in 2024, surpassing the Eurozone average (0.8% in 2023 and 1.4% in 2024). As for inflation, a much more contained growth is expected, with 4.3% in 2023, below the Eurozone average, and 3.2% in 2024.

We expect office occupier activity in the capital city to remain at similar levels seen last year, highlighting that tenants are increasingly seeking buildings with better facilities and technology, as well as prime locations. This trend suggests a rental increase towards the end of the year.

In the logistics sector, prime average rents in the main locations, Madrid and Barcelona, will continue to rise due to increased construction and financing costs, coupled with low availability of quality space. It is expected that the office and hotel sectors will continue to see the largest investment volumes this year.

Office investors will continue to focus on the main cities, Madrid and Barcelona. The hotel sector remains dynamic in Madrid and Barcelona, as well as in the main coastal locations. In this segment, there are several on-market transactions that are currently under negotiation, and upon their closure, which they will significantly increase the investment volume.

It is also expected that the Private rented sector sector will continue to see investment as it is a market with great potential in Spain due to the lack of stock and high demand, which continues to attract investors.

Although forecasts indicate a more moderate first half of the year, it is expected that investment activity will regain momentum in the second half of the year, thanks to improved macroeconomic prospects and the significant liquidity still available in the Spanish real estate market.

Sources: IMF, Knight Frank Research