European office investment sees a resurgence, led by the UK.

• Europe's long subdued office real estate market is experiencing a recovery, with the U.K. leading the way, and overall investment in the sector expected to increase in the second half of the year.
• While France and Germany are still facing challenges, Ireland, the Netherlands, and southern Europe are experiencing growth, according to Savills.
• Green credentials and highly amenitized properties are becoming increasingly popular, while occupancy rates remain a concern for properties without these features.

The U.K. is currently driving the revival of Europe's sluggish office real estate market, with predictions indicating that investment in the sector will continue to increase in the second half of the year.

In the first six months of 2024, office transactions in Britain amounted to 4.1 billion euros ($4.52 billion), which is approximately one-third (29%) of all European office deals, according to August data from Savills.

The company's share of transactions in the region has increased by 5% over the past five years, surpassing France's 1.8 billion euros and Germany's 1.7 billion euros worth of deals.

Despite the prolonged downturn in the office sector, which was affected by post-pandemic workplace shifts and higher interest rates, European office investment transactions in the first half of the year fell 21% year-on-year to 14.1 billion euros, according to Savills data. This represents a 60% decrease on the five-year H1 average.

As interest rates decline and investors search for profitable investments, industry analysts predict an increase in activity from September to year-end.

Mike Barnes, associate director in Savills' European commercial research team, stated via email to CNBC that the H1 transactional data is behind the market sentiment, but he is optimistic about the indicators for the future.

Europe's divided recovery

In 2022, the U.K. real estate market experienced a significant contraction, marking the first European market to do so.

The conclusion of the July general election and the Bank of England's initial rate cut have provided clarity to the market and boosted the rebound, mainly in the capital, according to analysts.

Fidelity International's head of research for European real estate, Kim Politzer, stated that London is currently leading the way due to its earlier and more significant repricing, as shared with CNBC over the phone.

The increase in returns has led to an increase in average annual office yields in London, which is now above 6% of property value, according to MSCI data. This is higher than the average annual office yields in Paris, Stockholm, and German cities, such as Berlin and Hamburg, which are around 4.5%.

As the European Central Bank continues to cut interest rates and reduce debt loads, the rebound is spreading to other markets, increasing liquidity.

Marcus Meijer, CEO of Mark, stated on CNBC's "Squawk Box Europe" that one of the main factors hindering liquidity in the European real estate market is interest rates and financing. He predicted that a decline in interest rates would help to alleviate this issue, with a positive outlook for the next 12 to 18 months.

Both Ireland and the Netherlands are experiencing growth and higher office occupancy rates, similar to the UK's trajectory, according to Savills. Additionally, Spain, Italy, and Portugal are also showing signs of strength with solid economic growth.

According to James Burke, director of Savills' global cross border investment team, Southern Europe is experiencing significant growth in office space occupancy.

In France and Germany, the recovery has not yet materialized due to political instability and slow growth, according to Tom Leahy, head of EMEA real estate research at MSCI. The ongoing "gulf in price expectations" between buyers and sellers in these countries is partly responsible for this.

"The markets are currently very illiquid, and further repricing may occur, as Leahy stated over the phone," she noted.

Leaseability concerns

Despite the positive return to the workplace in Europe, with vacancy rates at 8%, compared to 22% in the U.S., overall utilization still needs improvement.

In 2023, the European office take-up, measured in square meters, decreased by 17% compared to the pre-pandemic average, according to Savills. However, this trend is expected to reverse this year, with 61% of companies reporting average office utilization of 41% to 80%, compared to 48% of firms last year. Almost one-third of companies anticipate attendance levels to increase further.

Tenants are increasingly seeking modern and functional buildings in the CBD, which are close to public transport and local amenities, to attract their staff back to the workplace.

According to Savills' Burke, micro-locations are crucial because they are close to transport connections and highly amenitized areas from an F&B or leisure perspective.

The trend of green buildings is increasing in the U.K. and EU due to energy efficiency requirements.

In the second quarter of this year, more than three-quarters (77%) of London's office leasing activity was accounted for by grade A offices, which are typically newly constructed or renovated, according to an August report from Cushman & Wakefield.

Fidelity stated in a June report that green credentials of buildings could now be the "most crucial factor" in the new investment phase. Politzer added that landlords who meet those requirements can charge a "green premium" and command higher rents.

Green buildings of Grade A quality are in limited supply and tend to lease out before they are fully developed or refurbished, she stated.

Politzer stated that opportunistic players are likely to invest in green properties, while those that do not upgrade could face additional pressure. On the other hand, a lack of new developments is predicted to drive growth in high-quality offices in the coming years.

According to Andy Tyler, head of London office leasing at Cushman & Wakefield, the constrained development pipeline indicates that the amount of new office space entering the market will decrease in the coming year. This should result in a gradual decrease in both overall and grade A vacancy rates, and drive rental growth, particularly at the top end of the market.