People walk along London Bridge past the City of London skyline.
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LONDON — The U.K. is leading a recovery in Europe’s long subdued office real estate market, with overall investment in the sector expected to pick up further in the second half of the year.
Britain recorded 4.1 billion euros ($4.52 billion) worth of office transactions in the first six months of 2024, accounting for almost one-third (29%) of total European office deals, according to August data from international real estate firm Savills.
That marks a five percentage point increase on its five-year average (24%) share of transactions across the region, and surpasses France’s 1.8 billion euros (13%) and Germany’s 1.7 billion euros worth of deals (12%).
The spike comes amid a prolonged downturn in the office sector, which suffered the dual impacts of post-pandemic workplace shifts and the move to higher interest rates. Overall, European office investment transactions in the first half of the year fell 21% year-on-year to 14.1 billion euros, Savills data showed — a 60% decrease on the five-year H1 average.
But industry analysts now see activity gathering pace from September to year-end, as interest rates fall further and investors seek opportunities to capitalize on dislocated pricing.
“The H1 transactional data lags the market sentiment, but we’re confident that indicators for the future are positive,” Mike Barnes, associate director in Savills’ European commercial research team, told CNBC via email.
Europe’s divided recovery
The U.K. real estate market was the first in Europe to undergo a significant contraction following its peak in 2022.
However, the early conclusion of the July general election — along with the Bank of England’s initial rate cut — have brought some clarity to the market and added steam to the rebound, primarily within the capital, analysts said.
“London is leading the way a bit, partly because it repriced earlier and quicker and more significantly,” Kim Politzer, head of research for European real estate at Fidelity International, told CNBC over the phone.
Higher returns have partly driven that uptick, with average annual office yields in London rising to above 6% of property value this year, according to MSCI data. That compares to around 4.5% in Paris, Stockholm and German cities, such as Berlin and Hamburg.
The rebound is now seen filtering into other markets as the European Central Bank continues its rate cutting cycle, reducing debt loads and boosting liquidity.
Modern architecture in the La Défense area, on July 13, 2024, in the La Défense district of Paris, France.
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“One of the biggest things that’s been holding back liquidity in the European real estate market has been interest rates and financing,” Marcus Meijer, CEO of Mark, told CNBC’s “Squawk Box Europe” on Thursday. “A downward path on interest rates is going to start to open that up,” he added, pointing to positivity over the next 12 to…