Investors in the property sector are cautious at this time, due to the difficult financing situation and the investment alternatives that are available. An additional factor holding them back is the denominator effect: real estate is often overweighted in portfolios because bonds were devalued as a result of interest rate-related adjustments. The consequence of this is that investors have to increase the proportion of liquid assets before they can invest in property again. This trend has led to a decline in investment activity, which has been observed for some time now. Yet a rare opportunity to re-enter the real estate market is now opening up, one that investors should not miss.

Taking advantage of investment opportunities

Sustainable office buildings at central locations in major European cities are particularly attractive for investors. Despite high demand for space in the prime segment and dwindling supply, their multipliers are at a historically low level. For example, the multiplier in London is at its lowest level in fourteen years, while in Madrid, Paris and Dublin it is at a nine-year low. Due to the low number of potential buyers at present, there are opportunities to acquire high-quality core properties on attractive conditions that are difficult to access in normal phases of the market. This opportunity should be seized now, as a market upturn in this segment is slowly gaining momentum. So the denominator effect in real estate becomes the ‘Terminator’ effect, announcing, as in the Schwarzenegger film of the same name: "I'll be back!"

From a historical perspective, periods when assets decline in value are often followed by significant increases in value in the first year of market recovery. Following the financial market crisis in 2010, purchase prices for office properties in eleven major European cities rose by an average of 21 percent, and in London's West End by as much as 53 percent.

New pork cycle and gap in supply

We are at the beginning of a new pork cycle in the real estate market, which marks the opportunity to enter the market: the supply of sustainable core office space is lagging far behind demand. Office tenants are increasingly favouring high-quality energy-efficient properties with excellent public transport links in central business districts, likely leading to further rent increases. Many construction projects are significantly delayed due to high construction and financing costs, or are cancelled altogether.

This adds to the gap in supply: according to JLL, it will not be possible to meet 30 percent of the forecast demand for low-emission office space in 21 cities worldwide by 2025. This gap could grow to more than 70 percent by 2030.

Signs of an imminent market turnaround

In parallel with this, there are increasing signs of an imminent market recovery. The European Central Bank's first interest rate cut in years has sent out an important signal. A more stable interest rate environment would remove a major obstacle to property acquisitions and could lead to a new price equilibrium between buyers and sellers in the coming months, and to higher transaction activity. The entry bandwidth for potential buyers is also likely to widen, as many refinancing arrangements are pending and the high financing costs are increasing the motivation to sell property.

Conclusion

The core office segment currently offers exceptional opportunities for investors with good market access, due to low multiples by historical standards. Although these opportunities are still outside the usual competitive auction process, the market should soon become livelier again. To be positioned for future value growth, it is advisable to take advantage of the window of opportunity before it closes. The indexing in commercial property lease agreements means that they continue to offer protection against inflation along with value preservation, and are on average less volatile than other asset classes, and thus core offices are ideal assets for long-term portfolio stabilisation.