2024 Mid-Year Outlook – Focus on Europe: Strong Fundamentals Creating Optimism

Sum­ma­ry: The data are increas­ing­ly sug­gest­ing that a cor­rec­tion in the Euro­pean real estate mar­kets is close to complete.

By James Purvis, Head of Euro­pean Research at Hines

Eco­nom­ic activ­i­ty in the Euro­zone sur­prised to the upside in Q1 2024, with real GDP growth accel­er­at­ing to +0.3% quar­ter-over-quar­ter. That result was in line with the region’s long-run trend, and up from an aver­age of vir­tu­al­ly zero in 2023. The return to growth was broad-based across larg­er economies, with only the Nether­lands record­ing a small con­trac­tion (-0.1%). Ger­many, France and Italy all record­ed growth close to the region­al aver­age, while Spain con­tin­ued to lead. 

Look­ing ahead, the con­sen­sus is bull­ish that growth will now remain robust over the next cou­ple of years. Cen­tral Bank pol­i­cy­mak­ers also remain on track to bring infla­tion clos­er to their 2% tar­get in the near term, and as a result, mar­kets are pric­ing in ear­li­er and faster rate cuts from the ECB vs the Fed—a trend that has already kicked off with the ECB’s rate cut in ear­ly June 2024.

Mean­while, the data are increas­ing­ly sug­gest­ing that the cor­rec­tion in Euro­pean real estate mar­kets is close to com­plete. On our pan-Euro­pean index, prime cap rates across the main com­mer­cial sec­tors moved out by sev­en basis points quar­ter-over-quar­ter in Q1 2024. That was the slow­est pace of cap rate expan­sion since inter­est rates start­ed ris­ing and was dri­ven by only a small minor­i­ty of mar­kets that have been slow­er to cor­rect. The major­i­ty saw cap rates stabilize. 

We are also observ­ing a con­tin­ued recov­ery in Euro­pean list­ed real estate share prices, which are up 16% year-over-year at the time of this writ­ing in late May. Pub­lic mar­ket prices tend to lead the pri­vate mar­ket by around six months. Hence, the poten­tial for a near-term rebound in direct real estate val­ues appears to have improved.

How­ev­er, there still remains uncer­tain­ty around where inter­est rates, real estate cap­i­tal mar­kets activ­i­ty and cap rates will ulti­mate­ly land. Where we have greater con­vic­tion is around occu­pi­er mar­ket fun­da­men­tals, which are unusu­al­ly strong for this point in the cycle. 

Indeed, employ­ment in Europe was at a record high while, out­side of the logis­tics sec­tor, there has been very lit­tle sup­ply growth in the past 15 years. Con­struc­tion starts have also fall­en from gen­er­al­ly low lev­els across the board over the past 12 to 24 months. There­fore, against a back­drop of improv­ing eco­nom­ic growth, com­pet­i­tive rental ten­sions are like­ly to per­sist and the poten­tial to deliv­er alpha through grow­ing NOI appears favorable.

Exhib­it 1: Cor­rec­tion in Real Estate Val­ues Show­ing Signs of Stabilization

Correction in Real Estate Values Showing Signs of Stabilization
Source: Hines Research, CBRE. As of Q1 2024.