The zero interest rate policy pursued in the euro area for the past several years has enabled a boom to occur in the property sector. However, since the interest rate has increased, there has been downward pressure on property prices. Investment transactions on the property markets have collapsed, and have remained weak up to the present day. Uncertainty and caution continue to dominate the investment market. However, there are a number of reasons to believe that a property investment could be a particularly promising option in the coming months.

1. End of price correction – Interest rates have now stabilised somewhat, and the inverted yield curve shows that the market expects interest rate cuts. This eliminates a major impediment to property acquisitions: uncertainty over whether interest rates will rise in the short to medium term and further drive down property prices. So, there is a very high probability that the price correction will come to an end in the coming months.
    
2. Attractive yield level – Prime rents will reach new record levels in many markets in the coming months. They will then begin to fall with the expectation of decreasing interest rates. Currently, prime yields are at an eight-year high in Berlin and Munich; in Paris, Dublin and Madrid they are at a nine-year record level, and in London yields hit a fourteen-year high.
    
3. Opportunities for core properties – There are currently good opportunities to acquire core properties on attractive terms, owing to buyers’ caution in the market. In ‘normal’ market phases, with strong competition between bidders, these properties are hard to find, or they sell at higher prices. The owners of properties financed at very low interest rates in the past few years can come under pressure to sell in the event that the loan is renewed at a higher interest rate.
    
4. Potential price increase – Following the declining prices of 2022 and 2023, a price recovery can be expected in the next few months. Phases of declining prices have historically often been followed by very strong price increases in the first year of the market recovery. The purchase prices of office real estate in the eleven major cities of Europe in 2010 rose by an average of 21% in 2010 after the financial crisis (synthetic purchase price change based on yield and rental price development). Falling interest rates could be one of the drivers of this trend (see 1).
    
5. Increasing rents due to short supply: Many property developments have been halted due to the high costs of construction and financing, and few have restarted. The rental markets are characterised by a short supply of modern spaces in sought-after locations. This is clearly evident in the residential markets, but also in modern office and logistics properties. This means high cash flow security and rising rents in the coming years. By 2027, we expect rents for core office real estate in European countries to increase by around 8.4%, and those for residential and logistics real estate by around 12% and 13% respectively.
    
6. Inflation hedging via indexation arrangements – Indexation clauses in tenancy agreements remain advantageous and bolsters the performance of existing buildings. If, contrary to expectations, second-round effects lead to a further increase in inflation, property yield increases could cushion the impact.

Conclusion

2024 could be a very favourable time for investors to enter the real estate market. However, it is important to carry out a realistic risk assessment, and asset managers with local expertise and a local presence are needed. Prerequisites for success are excellent access to the market, ESG-certified investment opportunities and a constantly high occupancy rate. Most of all, what is needed is the far-sightedness and the strength to take active advantage of the window of opportunity for investments, in order to convert chances into investment success.