Newmark kicked off the annual Mipim industry gathering on the French Riviera with a bang. The United States brokerage firm announced the opening of an office in Paris, saying the market is expected to rebound as economic conditions gradually improve.

Delegates at Mipim agreed but sounded a bit more cautious. They warned that there won’t be a wholesale amount of investment opportunities and that the road to recovery will be bumpy.

“We have dry powder but it’s not burning,” said Sophie van Oosterom, global head of real estate at Schroders Investment Management. “Valuations of core properties have likely reached the bottom. Institutional investors are not in a hurry to sell or to invest. There will be more investment opportunities on the distressed side, highly leverage properties in not-so-great locations or that require a lot of capex. Due to stricter regulation, banks will no longer be able to extend and pretend.”

James Chapman, international partner at Cushman & Wakefield, head of EMEA Capital Markets, said there is in many cases still a little bit to go before the bottom of the market is reached.

“Like any trough it is bumpy, mixed,” said Chapman. “That’s why you need to focus on what’s working. This year is the year to double down because the recovery is happening now. The arbitrage between buyer and seller has fundamentally closed and is facilitating more activity.”

Whether there will be a flood of investments coming to the market remains to be seen.

Meanwhile, investors need to focus on pockets of opportunities. Take the sale of the Queens Towers in Amsterdam. Korean investor Kiwoom Asset Management had bought the 28,000-square-metre property for €130 million (US$142.12 million), a 4.7% yield, in 2019. German bank Helaba financed the purchase with a €78 million loan, which is maturing this year. Colliers is marketing the asset with a circa €90 million guide price. However, market participants believe the property is more realistically valued at around €75 million, 10 times the annual rent. That would cover the loan but leave Kiwoom empty handed.

Neighbouring Germany is expected to offer the most of such pockets of opportunities. Here, properties traded for record high prices before interest rates started to climb early 2022. Investors saw the country as a safe haven, thanks to a strong economy. At the end of last year, the country narrowly avoided recession. This year, the economy is expected to grow only 0.2%.

“Investors need to focus on individual opportunities, not on trends or market movements,” said Marcus Lemli, chief executive of Savills Germany and head of European investments. “Some will have distress, others liquidity problems, you can’t apply a broad brush.”

A string of developers has filed for insolvency as interest rates and material costs soared and the market collapsed. The insolvency of Austrian developer and investor Signa is already leading to a flurry of sales. Some of these will be straightforward with a small discount as they are good properties in prime locations. Others will be more complex, such as Elbtower. CBRE has been mandated to find investors wanting to take on the unfinished office tower.

The country’s open-ended funds are starting to feel the pain too as retail investors are pulling their money out. They need to sell properties to repay investors wanting to get out. They are sitting on a large pile of mostly outdated offices.

German fund manager Real IS, which does not manage open-ended funds, said in a recent note that herein lies the opportunity. Existing office buildings in Germany, Benelux, France and the UK could be upgraded through energy optimisation and developing flexible space. But it warned that investors need to be careful.

“What is important currently is to be realistic in assessing risks and to buy at a discount while transactions volumes are low in order to secure future returns,” said Sven Scherbetisch, director, research and investment strategy at Real IS.

Offices are likely to be too daunting for many investors, particularly if they’re from the US, having witnessed the collapse of the office market at home. Residential and logistics properties, referred to as beds and sheds, are still at the top of the list for both investors and lenders as they provide stable income and benefit from rising rents, albeit at more moderately levels than before. It is no coincidence that the first commercial mortgage-backed securities of 2024 will be backed by a portfolio of logistics properties in the UK owned by Blackstone Group, just like two of the three CMBS transactions in 2023. Properties in the UK have repriced quicker than in other European countries. Southern European countries are following, then Central Europe, and Germany at the back of the queue, said Savills' Lemli.

While there may not be much activity yet, the mood at Mipim has improved since the Expo Real trade fair in Munich in October. Five months ago, investors were still wondering how much further interest rates would rise. This uncertainty made it difficult to price real estate. Now that the European Central Bank and the Bank of England are done with hiking interest rates, cuts cannot come soon enough for investors. Lower interest rates will not only provide more certainty, but it will also help property owners who need to refinance their assets.

“There was too much optimism about interest rates at the start of the year,” said Cushman’s Chapman. “People expected too much of a reduction. That is more moderated now.”