Recovery in sight for European commercial real estate?

European commercial real estate (CRE) has been going through tough times. As a result, transaction volumes have plunged to half their average for the past six years, says PineBridge Investments. A rise in interest rates, higher bond yields, and attractive equity valuations have led investors to other avenues.

Marc Mogull, chairman of PineBridge Benson Elliott, cautions, “..the distress across parts of the European CRE market could be significant and (relatively) long-lived. While few participants will be completely spared, this inflexion point is expected to create a distinct opportunity for those with the capital to take advantage.”

According to the asset manager, the European CRE market is grappling with liquidity and valuation problems. Transaction volumes are low, and the lack of price discovery artificially inflates the investors’ exposure to real estate, as per Mogull.

Mogull opines that current property owners will have to be content with sizeable portions of the retail and office markets. “These two sectors are too big a component of the already invested universe for a healthy market to subsist until they’re repriced to levels that allow willing buyers and sellers to meet,” the asset manager says. The marginal rise in the share of global CRE transaction volumes of the offices and retail in the fourth quarter of 2022 adds to the optimism.

At the same time, PineBridge suggests that more buyers need to expand their budget, but that can happen only when there is more inflow in the market. Mogull says, “Perhaps the most important indicator I’m watching is debt yields….Until six-month gilts are no longer yielding north of 5.5%, investors can’t very well be expected to plow back into the property sector.”

The asset manager predicts that when current short-term bond holdings expire and bond yields decline, the risk-adjusted returns of real estate may begin to look appealing. Finally, PineBridge urges commercial real estate buyers to prepare for the right time and wait for the prices to rebound.

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