Navigating Headwinds: Europe’s Investment Opportunities in 2024
Despite headwinds, Europe stands as the largest destination for global cross-border capital in the first half of 2024. Private capital emerged as a crucial driver while the logistics and residential sectors remain prime targets for investors. The start of easing monetary policy provides a more conducive investment environment, making Europe well-positioned as a destination for cross-border capital.
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Signs of recovery in certain locations
In the first half of 2024, the top European cross-border destinations were the UK, Germany, France, Spain, and the Netherlands, with institutional investors dominating the landscape.
Although cross-border investment volumes in some major European markets were lower than expected due to ongoing economic and political uncertainties, specific locations began to show signs of recovery.
Germany maintained its position as the third-largest destination for global cross-border capital despite softer volumes, while France ranked fifth. Spain's cross-border investment, although muted compared to recent years, was nearly three times higher than the average volumes during the global financial crisis and Eurozone debt crisis periods.
By contrast, the Netherlands saw a significant increase of approximately 31% compared to the same period last year. More than half of international capital came from US investors, mostly targeting logistics and residential.
Similarly, Italy saw a 20% increase in cross-border investment year-on-year in H1 2024, with US investors accounting for around 47% of international capital. The most targeted sectors were logistics and retail. Ireland recorded a more than 70% rise in cross-border capital compared to the previous year, signalling a more positive momentum although volumes remained below the long-term average.
Moreover, there are signs of revival in the Polish market. Poland’s cross-border investment already reached the full-year 2023 volume, supported by one large portfolio transaction. CEE investors have been active but 2024 has also been marked by the return of UK capital.
Looking ahead to the remainder of the year, we do not anticipate a V-shaped rebound in activity, and overall volumes in 2024 are likely to remain relatively soft. However, the impact of interest rate cuts across Europe may help unlock activity.
In the Eurozone, cross-border transaction volumes for the first month of Q3 reached approximately EUR2.5 billion, with an additional EUR7.7 billion under contract or pending. While the typically slower summer period may temper activity, if this pace continues, we could see gradual improvement as the effects of the ECB interest rate cut in June begin to take hold.
In Sweden, the central bank further reduced the main policy rate by 25bps to 3.5% in August, following the first rate cut in May. Although total Q2 volume was still 19% lower compared to the previous year, it marked a 36% increase from Q1. Importantly, Q3 has already seen EUR1.1 billion in completed and pending deals. While this is largely driven by domestic investors, it will likely provide positive momentum for cross-border activity.
Improving economic outlook to support the investment environment
The economic environment began to show positive signs, with inflation moving towards target levels and the ECB and several other central banks in Europe having started to ease monetary policy, creating a more favourable backdrop for commercial real estate investments.
The 5-year Euribor swap rate dipped below 2.5% in early August for the first time since January and currently trades at around 2.3%, down from around 3.3% a year ago. This decline has helped make debt more accretive to returns on core real estate across Europe and has allowed for easier access to loans for both large and non-prime deals. Forecasters expect the main ECB policy rate to settle at around 3.75-4.00% by the end of 2024, with further rate cuts anticipated in 2025.
Interest rate policy within the Eurozone is influenced by the diverse economic landscape. Southern European economies like Spain continue to outperform, supported by a surge in tourism-related industries and service sector growth. On the flip side, even while somewhere like Germany is seeing soft economics, this is on the back of GDP which is already above pre-pandemic levels.
"Europe's resilience as a prime destination for cross-border capital in the first half of 2024 is a testament to the region's enduring appeal despite global economic uncertainties.
While some markets faced challenges, others have shown remarkable recovery, bolstered by private capital and targeted investments in logistics and residential sectors.
The early signs of monetary easing across Europe are beginning to create a more supportive climate for investors, reinforcing Europe’s position as a strategic choice for capital deployment in a shifting global landscape."
Mike Bowden, Managing Director, Knight Frank Europe & Co-Head of European Capital Markets
Industrial and residential sectors are key targets for cross-border capital
Investors largely focus on the "beds and sheds" theme as anticipated in our Active Capital research. The logistics and residential sectors have attracted significant cross-border investment due to their strong long-term structural tailwinds.
In France, cross-border investment in the logistics sector has already surpassed the entire 2023 total and exceeded the 10-year H1 average by 24%. Norway also recorded its best first half ever for logistics cross-border investment, primarily driven by Swedish institutional investors. The softer Norwegian krone likely supported this influx of investment.
Tourism recovery drives hospitality inbound investment
The European hotels sector saw its second-best H1 cross-border investment on record, with volumes 30% above the 10-year H1 average, fuelled by growth in the hospitality sector. A significant portion of this investment came from US capital. Hotel inbound investment is likely to stay robust for the remainder of the year as international investors are expected to capitalise on attractive pricing levels across various European locations. Additionally, the sector's appeal is enhanced by the opportunity for investors to participate in performance through management contracts.
In the UK, H1 2024 cross-border hotel investment volumes were more than double the 10-year H1 average, with London being the focal point. Much of this activity was driven by portfolio transactions, with active capital from a mix of private equity and institutional buyers. US investors have dominated the UK hotel investment landscape, accounting for approximately 84% of cross-border activity.
Ireland experienced its best first half on record for hotel cross-border investment, driven largely by private buyers. In Italy, inbound hotel investment in H1 2024 more than doubled compared to H1 2023, reaching levels similar to those seen post-GFC.
Having seen significant repricing over the last years, the retail sector has seen a revival in some markets supported by strong tourism and improving footfall levels. In Spain, retail was the most invested sector for cross-border capital in H1 2024 followed by hotels. It surpassed already last year’s total and recorded the highest inbound volume since H1 2020. Similarly, Italy, and Poland saw the best inbound retail activity since H1 2022, outperforming last year’s totals.
Private equity offers a sign of hope for offices
While the European office sector might be overshadowed, the occupational markets remain robust. For instance, the average European office vacancy rate was below 10% at the end of Q2 2024, less than half of the rates observed in many US cities. Meanwhile, London witnessed the return of US private equity to the office market, signalling a glimmer of hope for the sector. This influx of US private equity capital into London offices is expected to continue throughout the remainder of the year and suggests further activity across Europe.
Private capital plays a pivotal role in driving cross-border investment
Despite the prevailing uncertainties, there is a considerable pool of capital poised for deployment. From a geographical perspective, the US and UK were the largest sources of cross-border capital into Europe, outperforming last year’s H1 result. The relative softness of the Euro against the USD has likely supported the influx of US cross-border capital. Singaporean investors have also remained active in Europe, taking advantage of currency and hedging benefits.
Institutions dominate the investment landscape but private capital's agility and lesser reliance on upfront debt position it as a key player in the market's recovery. There has been increased private investment activity in some key European markets, mostly targeted at the hotel, retail and logistics sectors.
In H1 2024, Spain led Europe for private cross-border capital, bolstered by above-average economic growth, followed by the UK and Germany. Spain's private cross-border capital reached record levels for a first half-year in both volume and number of deals, already surpassing the full-year 2023 volume and accounting for more than half of the total cross-border investment in H1 2024.
In Germany, the private share of total cross-border capital was 35% in H1 2024, well above the 10-year H1 average of 16%. Ireland recorded its highest first half-year for private cross-border capital, both in volume and number of deals, making up over 60% of total cross-border capital.
France saw its highest private cross-border capital investment in a first half-year since 2015 and more than 40% above the 10-year H1 average. French hotels were the most targeted asset class in terms of investment volume, while logistics recorded the highest number of deals.
Looking ahead
With the current momentum and the impact of recent interest rate cuts, Europe is well-positioned to maintain its status as a prime destination for cross-border capital throughout the remainder of 2024.
Looking further ahead, we can identify clear trends influenced by major infrastructure investments, spanning from digital technology, transportation, energy, and the transition to net zero.
Physical infrastructure, for instance, is evolving new opportunities for logistics in Europe. A case in point is the Fehmarn Belt Tunnel, which will enhance connectivity between the Nordic regions and Central Europe, reinforcing the efficiency of the 'Green Banana' logistics corridor.
On the digital front, the rise of technologies like AI necessitates robust data infrastructure. Our research suggests a steady growth in European data centre supply, with an estimated annual increase of almost 11% leading up to 2030. This presents a landscape of opportunities for investors.
Sources: MSCI Real Capital Analytics, Knight Frank Research
You can read more from our Active Capital research programme at www.knightfrank.com/active-capital.