European property values experience 16% decline

European property values fell by 16% in the 18 months to the end of 2023, according to new data analysing €33bn (£28.2bn) of assets in core pan-European diversified open-ended funds. Values were written down by 9% in 2023, with the final three months bringing the sixth successive quarterly decline and the largest of the year at 3.4%. Adding in the more pronounced write-downs at the back end of 2022, the current period of correction has reached 16%, according to commercial real estate intelligence firm Altus Group. The firm’s new pan-European valuation dataset looks at how and why property values are changing. Its analysis highlights how valuation yields are primarily responsible for the downward pressure in all markets. This is mostly a response to rising interest rates in the wider European region and the parallel tightening of lending requirements. Both lead to investors underwriting properties at discounted prices to achieve their required returns. All sectors have been affected, but the largest corrections were within the office and industrial sectors. Cash flows, part of which includes the linked rent indexations, remained on the rise, but this provided only minimal cushioning to values. The European market is seeing a rise in the adoption of the discounted cash flow valuation methodology against the widespread traditional valuation methodology. As more of its dataset shifts towards DCF valuations, Altus said it would be able to quantify how much of that cash flow growth is driven by indexations versus how much is driven by rent adjustments. Sector breakdown Offices The office sector, which suffered a massive wake-up call from the pandemic with the change in working practices, has been cast furthest adrift. Values were down by 14% over the year, with 5.2% of that happening in Q4. The sector experienced the largest increase in yields as investors reassessed growth prospects. In effect, this took 16.9% off property values in the past year. Representing more than 40% of the dataset, its impact on the overall results means offices was the only sector where values fell by more than average. Industrial, residential & retail All three held out better than average but for different reasons.  Improved cash flow levels for industrial meant greater protection for values, while retail and residential experienced a less pure price adjustment. The limited correction in the retail sector has to be seen in the context of the structural corrections the sector went through in the years before the pandemic. Meanwhile, the resilience shown by the residential sector during the pandemic fuelled continued higher demand, and therefore pricing, in contrast to the macroeconomic headwinds affecting the wider economy. UK performance In the industrial sector, it is worth noting the UK was one of the most resilient markets, along with Spain and Poland. Values in the UK rose over the year, but that followed on from value declines in 2022. Germany and France, which account for a third of the industrial allocation across the dataset, saw the largest write-downs over the year. The Netherlands, which is the largest invested market, was in line with the average and saw value declines ease off in Q4 2023. UK office values also held up better than average, which may be more a reflection of the better-quality assets held by these pan-European funds which have been focusing on the more prime end of the market. France, Germany and the Netherlands experienced the larger value write-downs for offices, with declines in the high teens over the year. Germany and France accounted for more than 50% of the office exposure across the pan-European fund dataset. Values in the surrounding Nordic, Eastern and Southern European markets proved to be more resilient, with value declines for the year in high single-digit territory.