Too early to call the bottom, with offices set for more pain

A weak economic outlook underpins our view that prime rent growth will continue to slow in Europe next year. At the same time, valuations remain stretched and the pace of recent yield rises suggests it is too early to call the bottom in prices. As a result, we think yields will climb higher and values will fall further in 2024 with offices underperforming, though price declines will be considerably smaller than those we’ve seen to-date. As yields stabilise, an improvement in rent growth will allow capital values to rise again in 2025. However, the rental outlook remains weak for the coming years and with little or no yield compression anticipated over the forecast, the recovery in capital values will be sluggish. Indeed, few markets will record any net value increases. Offices are expected to be the worst performing sector with returns of 4.6% p.a. in the euro-zone over 2024-27. Retail does slightly better with returns of around 5% p.a. while a brighter rent outlook means industrial leads the way with annual returns of 7%.