European office properties remain a resilient asset class, despite the ongoing challenging market environment. This applies in particular to ‘core’ real estate in prime locations that meet high standards of sustainability. These properties continue to offer stable cash flows owing to strong demand and limited supply, combined with long-term potential for value appreciation. Far-sighted investments and active asset management are needed to leverage this potential.

The European office property market is more robust compared to other global markets, in particular the US market. In the United States, the increase in working from home has resulted in a higher vacancy rate in city offices – currently around 21 per cent. European markets are much more solid with a vacancy rate of about eight per cent. Most European properties are also more energy-efficient and financing is more reliant on fixed-interest loans what enhances market stability. Whereas in the United States, financing is arranged with variable interest rates to a much greater extent. The more significant rise in interest rates is therefore having an even faster impact on the property-related cash flows of real estate holders and has increased the pressure on prices.

The future of the office is being hotly debated in the market. Although the way we work and live may now be completely different, the office remains a central part of working live. This is confirmed by the results of a survey among 1,530 office workers carried out by JLL in Berlin, Duesseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart in June 2024. Employees are being drawn back to the office. At 3.6 days, the attendance rate is approaching the level before the Covid pandemic, when people worked in the office four days a week on average. The attendance rate is also 0.4 days higher than a year ago. So, the current return-to-office rate (RTO) (the current rate of office attendance compared to the period before the pandemic, measured in days) has increased to 89 per cent as compared to 79 per cent in the previous year. This trend was due to changes to attendance rules at companies, although according to JLL, employees with the option of choosing their place of work are also returning to the office more and more.

However, to achieve high space utilisation, offices must meet today’s user requirements, and offer space for new working environments. In addition to a high quality of user experience and an attractive working environment, good accessibility and proximity to public transport are key location factors. This is also reflected by solid trends on the top-segment rental market: office take-up in five major German cities (Berlin, Duesseldorf, Frankfurt am Main, Hamburg, Munich), analysed by JLL, was around six per cent higher in the second quarter of 2024 than in the first quarter of the year, for example, and about 14 percent above the level of the same quarter of the previous year.

Office properties also remain attractive for investors due to high demand, provided they take a close look at the market. At present, it can be particularly worthwhile to look for entry-level opportunities in European office real estate, as multipliers in many European cities are at a historically low level after significant price discounts in the last two years. In past years price correction phases have often been followed by rapid and clear market recoveries. After the financial market crisis, the prices of office real estate in the eleven major cities of Europe rose by an average of 21 per cent in 2010 (synthetic purchase price change based on yield and rental price development).  

There are increasingly signs that the market is now moving into a recovery phase and transaction activity will rise again. There is reason for optimism: after the European Central Bank had cut its key interest rate for the first time in almost five years in June 2024, it reduced the rate further in September. The most important key interest rate in the euro area, the interest rate for bank deposits at the ECB, has been 3.5 per cent since then. Interest rate cuts improve the finance environment and reduce borrowing costs. 

Some examples clearly show that initial yields for office properties in many prime European locations are currently at peak levels and thus offer opportunities for real estate investments. This includes markets such as Rotterdam and Amsterdam with net initial yields of 5.7 and 4.8 per cent respectively. However, the stability of cash flows and the potential for value appreciation of properties in these markets need to be carefully analysed, as real estate transfer tax (RETT) has been raised sharply since 2023. Consequently, ancillary purchase costs are high in the Netherlands. This in turn reduces competition for attractive properties and makes it even more important to have local market expertise.

Yields in cities like Dublin, Madrid, London and Paris are currently at high levels. In the City of London, for example, top office properties are offered at initial yields of between 5 and 6 per cent, and at between 4 and 5 per cent in the submarket West End/Midtown – the highest level since 2010.

Already today, demand for modern and ecologically sustainable office space in good locations is outstripping supply. The supply gap is expected to increase in the coming years because of the postponement or even halting of many new building projects due to the current general economic situation. By 2025, around 30 percent of global market demand for ‘green’ (i.e. energy-efficient and low-carbon) office space will not be met, with the potential gap exceeding 70 percent by 2030, according to a report from real estate firm JLL. This offers investors long-term opportunities if they invest in sustainable real estate at an early stage.

There is no precise definition of when properties are sustainable. However, taking ESG criteria into account is undoubtedly part of it. They are becoming increasingly important for investors and users. The compatibility of buildings with the Paris Climate Agreement and their conformity with the EU taxonomy secure high letting levels over the long term and the prospect of increases in value. Another important factor for the stability of real estate investments is active asset management. Approaches like ‘manage-to-green’ and ‘manage-to-core’, based on value-added strategies, are crucial to the future viability of investments. The proximity to tenants and an understanding of their needs are key for stable rental income as well and may help to underpin the long-term success of the portfolio.

In order to take advantage of the ‘flight to quality’ and growing prime rents, Real I.S. continues to concentrate on the ‘core’ und ‘core+’ segments. In addition, we invest in property use types such as logistics, residential, hotel and retail real estate. Our focus in the office segment remains on office properties in the most important European metropolitan cities. An example is the K-Tower in Lisbon, completed in 2023, with a total rental space of around 15,000 square metres. Real I.S. acquired the office complex for its open-ended retail real estate fund REALISINVEST EUROPA. The fully-let building has obtained BREEAM (Building Research Establishment Environmental Assessment Methodology) certification with the rating ‘excellent’. So K-Tower is one of the first properties in Portugal that fulfil the requirements of the EU Taxonomy Regulation.

Further examples for office investments of Real I.S. are the Anthémis in Lyon, France, and the office building in 53 Avenue Hoche in Paris. These completely refurbished properties are also fully let.

Thanks to our geographic diversification and offices in key markets such as Germany, France, Luxembourg, Spain, the Netherlands and Ireland, we are able to react quickly to regional market trends and to offer customised investment solutions which take account of both opportunities for yield generation and security aspects.