Five Big Investment Opportunities in European Real Estate in 2024

This perspective is part of our Navigating a Changing Landscape: The Five Big Investment Opportunities series.

The year ahead will provide a time-limited window for savvy investors to capitalize on unexpired market dislocation and secure quality assets with value-add potential at discounted pricing across Europe.

The environment for real estate investing will only improve gradually in 2024. Weak growth will continue, while core inflation will prove stubborn supporting only modest declines in current peak policy rates. Geopolitical tensions skew risks to investor sentiment towards the downside. Together, these market dynamics will reduce competition even for prime assets—including some highly-prized assets that rarely trade—which are expected to come to the market given mounting liquidity pressures.

Over the next 12 months or so, we anticipate a high volume of European real estate assets will come to market through at least five distinct channels. This will provide an opportunity for investors to secure value-add style assets at discounted prices with strong fundamentals and bristling with value creation potential. As the year matures, and the landscape for real estate investment gradually recovers, the window for equity-based investors to capitalize on this market dislocation will narrow. Therefore, savvy investors should be on high alert now to seize the best of the investment opportunity ahead. In this article, we outline the five discrete channels we expect will provide access to attractive European real estate assets in 2024.

1. German market

Germany has been a highly attractive investment market for the last 15 years but sustained high interest rates have reduced finance liquidity for development, acquisitions and refinancing. Many developers in Germany, and to a lesser extent also in Sweden, have become overleveraged after years of high borrowing levels in a low-interest rate environment. This situation has created liquidity pressures as higher interest rates and falling valuations have left developers among others unable to finance projects and as banks and other lenders have withdrawn support. The result has been insolvencies among several high-profile developers, leading to potential asset sales and discounted pricing. This environment has created an opportunity for cash-rich investors to forward fund poorly capitalized developers, notably for multifamily residential and logistics schemes that are still supported by favorable supply-demand dynamics and continued rent growth. A tight domestic financing market will significantly reduce competition in selectively acquiring prime logistics and residential development projects throughout this year as some owners are forced to sell prized schemes to shore up their balance sheets and deleverage. The opportunity exists to selectively acquire assets in Germany in a disciplined manner. While the economy is expected to struggle and/or limp along in 2024, this may prove the year the market finds a bottom.

2. Redemption pressure among open-ended funds

Europe’s open-ended real estate funds have ongoing redemption pressures driven by a desire to rebalance portfolios by reducing overweight office allocations. The open-ended funds are motivated sellers rather than distressed sellers and will typically opt to divest highly liquid assets to protect fund returns. As a result, properties for sale will include some highly prized prime assets that rarely come to market. We anticipate a high volume of non-distressed asset sales by large open-ended funds that will become more visible over time. The still prevailing low liquidity environment will tip the opportunity set in favor of cash-rich investors who can act fast, reducing competition from debt-dependent opportunistic funds and leveraged private equity buyers. The lack of heavy competition will present a generational opportunity for equity investors to acquire rarely traded prime assets, including some at potentially discounted prices.

Besides direct sales from open-ended funds, closed-ended fund maturities will also give rise to opportunities to invest in infrequently traded prime assets through secondary strategies, where operating partners are motivated to maintain ownership in prized assets. Secondaries investing is a highly effective execution method to secure high-quality real estate during periods of low transaction volumes and liquidity. Market inefficiencies and liquidity constraints often allow investors to acquire high-quality assets at a discount to the intrinsic value of the underlying assets. This allows investors to generate value-add or opportunistic returns while investing in properties without assuming equivalent property-level risk. We expect vehicle maturities will create opportunities in both direct sales and secondary strategies and investors must remain alert to both channels to capitalize on the most attractive opportunities.

3. Retail renaissance

After the cumulative impact of e-commerce adoption and changing consumer spending habits, as well as the more recent pandemic lockdowns which accelerated a preference for services over goods (e.g., gym memberships, Netflix, Amazon Prime and Spotify subscriptions, etc.), the retail sector has repriced to historically low levels.

Retail property values and rents have rebased, offering a favorable set of circumstances to generate attractive income returns for certain value-add investments. In the year ahead, we expect opportunities to acquire dominant retail assets with stable income streams, including shopping centers across Europe that proved resilient in the face of challenges such as the pandemic, reinforcing their investment appeal. This is the moment for disciplined investors in the retail sector to achieve healthy risk-adjusted investment returns by identifying resilient properties with certain repositioning potential.

While prime retail has adjusted to trends, not all retail owners have transitioned assets. This is not an environment where a rising tide lifts all boats. Many retail assets have not been transitioned and continue to struggle under the weight of high vacancies with suboptimal omni-channel integration, as some owners simply lack the capital, expertise or the innovation know-how required for the required transformation.

The winners of the retail renaissance have coalesced around three pillars: location, proposition and execution. The alignment of these three inter-related variables creates the foundation for a best-in-class retail destination that can create value, foster communities, and drive rent growth in support of long-term risk-adjusted investment performance. Identifying those assets with high potential from the broader European retail investment universe will be a crucial performance differentiator.

The retail market has overcome huge structural changes and challenges, which has left many core investors hesitant to return until a longer track record of sustainable rental growth emerges. For value-add investors with retail expertise, an understanding of the sector’s trajectory and an ability to execute, the opportunity is now. Core investors are the optimal eventual long-term owners for assets acquired at the current time ahead of a longer performance track record being re-established.

4. Mixed-use properties

Mixed-use properties present investment complexity but also high potential returns. The successful delivery of mixed-use buildings demands a higher level of operational and technological sophistication than ever before, which has increased the complexity of integration of different use cases within a single building. Consequently, some investors feel underequipped to meet exacting tenant expectations in one or more of the traditional product mix: retail, office or residential. For other investors, there is an unwillingness to invest in a sector, which they perceive still faces headwinds (e.g., retail, office). The net effect is a reduction in the number of investors willing to operate mixed-use properties.

We think many have forgotten how compelling the investment case is for mixed-use assets in prime urban locations. As some investors seek mixed-use property exits, a thin investor bidding pool will present attractive discounted pricing for those managers confident in their ability to deliver across all real estate segments and create the right balance among them. Assets in the right location, with the opportunity to add value by refurbishing and/or repositioning part of the building, could provide significant upside. With little competition, the opportunity exists for sophisticated real estate managers and operators.

5. Capex pressure and value creation

Continuing with the prior theme, investors and landlords are facing increased demand to keep their assets relevant (e.g., ancillary services and amenities, technological conveniences and sustainability regulations), which can be cost prohibitive for existing owners. In many cases, capex pressures will prompt capital-constrained and/or overleveraged owners to seek an exit, opening the door for new investors. Landlords unable or unwilling to modernize legacy assets will often have to sell properties at a discount to prevent the risk of obsolescence, as tenants decline to re-lease in assets that fail to meet rising expectations.

Conclusion

At CBRE IM, we expect to capitalize on all these five discrete channels to acquire high-quality value-add assets at discounted prices. We identify opportunities through the interplay of our investor-developer and operator mindset, which shapes our dynamic understanding of client, tenant and end-user requirements. This approach, along with our relationships across the European real estate industry, empowers our conviction to move quickly and at scale, while staying disciplined to optimize the current opportunity.