Investors are currently still holding back on real estate because of the uncertain geopolitical situation and the as yet unforeseeable consequences for the financing environment and the return potential of alternative investments. The denominator effect is also slowing down portfolios: real estate is often overweight due to interest-induced corrections in bonds, so investors have to increase the proportion of liquid assets again before they can invest in real estate again. The result is a subdued trend in investment transactions, which we have been observing for some time. The current market situation offers an opportunity to re-enter the real estate market that has not been seen for many years, which investors should not miss.
Time window for investment opportunities
Sustainable and centrally located office properties in top European locations are particularly interesting, for which there is still a high demand for space but also an increasing shortage of supply. Crucially, their multipliers are currently at historically low levels – in London, for example, at their lowest level in 14 years; Madrid, Paris and Dublin are at a nine-year low. The current low number of prospective buyers on the market creates opportunities for exceptionally attractive core properties that are difficult to obtain or at a premium in “normal” market phases. This opportunity must now be seized. Because the “comeback” of the markets is already emerging. This is how the demonstrator effect becomes the terminator effect for real estate, loosely based on the famous announcement: “I will be back!”
Historically, phases of value declines often lead to very high increases in value in the first year of market recovery. After the financial market crisis in 2010, for example, office properties recorded an average purchase price increase of 21 percent in eleven European metropolises, and as much as 53 percent in London's West End.
The next pig cycle is imminent – supply gap is growing
In fact, we are at the beginning of a new pig cycle in real estate: the supply, especially of sustainable core office space, is clearly lagging behind demand. On the user side, there is a steady “flight to quality”, i.e. to well-connected, high-quality and energy-efficient offices in central CBD locations, which registered rent increases in 2024 and are therefore likely to continue to grow in the coming years. However, many project developments are significantly delayed or cancelled altogether due to the increased construction and financing costs. The supply gap is becoming correspondingly larger and the situation is likely to worsen further: According to JLL, 30 percent of the projected demand for low-emission office space will not be met in 21 cities worldwide by 2025, and by 2030 the gap could grow to over 70 percent.
In the logistics segment, on the other hand, the low vacancy rates are also promoting rental growth and making this asset class even more attractive for real estate investors. In addition, there is the erratic tariff policy triggered by US President Donald Trump, which is not only causing distortions in the liquid asset classes, but is also leaving grinding marks in the real economy. As far as logistics real estate is concerned, however, market participants even see a trend towards increasing demand in view of the looming deglobalization. This is because just-in-time supply chains across continents that have been established for years are abruptly interrupted and lead to the build-up of local inventories.
Signs of imminent market reversal
Against this background, there are certainly reliable signs of a market recovery, which is unlikely to prove to be a flash in the pan. The ECB's interest rate cuts in recent months are contributing to this. It is quite possible that further interest rate hikes will follow depending on economic developments. With a lower interest rate environment, a major hurdle for real estate purchases will be removed. This should lead to a new price balance between real estate buyers and sellers in the coming months and to a revival of the transaction market. The entry bandwidth for potential buyers is also likely to increase as a result of the fact that many follow-up financing is pending on the market and the high financing costs increase the motivation to put real estate on the market.
Result: Investors with good market access are currently finding exceptional opportunities that have not been seen for a long time due to historically low multiples, especially in the core office segment. They are still outside the usual bidding competition. But the market is likely to pick up again soon. Investors should therefore not miss the window of opportunity to position themselves in time for future value increases.
In general, the fact that they continue to offer inflation protection and also value protection through indexation in the rental contracts, as is common with commercial real estate, still speaks in favor of investing in real estate. In the current environment, another key advantage is once again apparent: real estate is less volatile compared to other asset classes. With their rental income, they ensure steady cash flow and are ideal for the long-term stabilization of portfolios.
Tobias Kotz, Global Head of Client Relations & Capital Funding, Real I.S. AG
