The assessment of value trends in real estate assets indicates that the decline is expected to halt before year’s end. This is the central finding of the Return Forecast report prepared by Colliers, which suggests that prime office spaces in Madrid and Barcelona, the key markets within the sector, have fallen by roughly 30% since the first quarter of 2022.
From the report’s initial edition released in April 2022, the market has shown signs of stabilisation following the onset of the Ukrainian conflict. Yields rose by about 1% to 1.5% as investors shifted expectations. In the first quarter of last year, an investor targeting central Madrid and Barcelona offices anticipated a 3.5% return; that figure has since moved higher, with current expectations around 4.6% to 4.8% in some cases. When buyers demand greater profitability, they are effectively willing to pay less for assets, contributing to a theoretical price correction near 30% that has yet to be fully crystallised due to processing delays. The required returns are linked to the risk-free rate, which is reflected by the current ten-year Spanish bond yielding around 3.7%. Additional returns are needed to account for the higher risk associated with real estate compared to government debt.
At present, analysts do not foresee a larger correction than the declines already realized. The strongest phase of the Spanish real estate adjustment is projected to occur in 2023, with prices bottoming out as transactions resume. Jorge Laguna, Business Intelligence director at Colliers, notes that activity has contracted markedly, with volumes down as much as 50% in the first half of the year, reflecting a widening gap between buyers’ willingness to pay and sellers’ price expectations.
What will happen in the coming months?
According to Colliers’ experts, the European Central Bank is expected to pause rate hikes at roughly 4.25% to 4.5%, which should slow the rise in yields for real estate assets. It is anticipated that government bonds may peak in the latter half of the year. From that point, property prices are likely to be determined more clearly, with stable returns ranging from 4.6% to 4.8% through 2024 and 2025.
This development should bring greater clarity to markets. The potential for short- to medium-term rate cuts could open new investment opportunities, and many industry players are expected to benefit. Holders may adjust portfolios to the new environment, moving price expectations closer to what investors are willing to pay, which could revive activity. Colliers’ model also predicts a contraction in yields of around 60 basis points from 2026 onward.
Values won’t recover until 2026
Jorge Laguna notes that by year-end, investors could begin issuing more realistic offers and securing attractive returns. A building in a good location purchased at around 4.9% yields becomes interesting as yields are expected to stabilise over time. Property owners may adjust debt maturities to align with the new market, and investment activity is expected to slow in the third quarter of 2023 before picking up in the fourth quarter and continuing into 2024. The report suggests that buyers who completed purchases in 2023 and early 2024 can still achieve solid returns as yields compress. For deals where debt is not fully deployed, annual returns could approach double digits, and even higher with leveraged structures. Nevertheless, sustained profitability is forecast to take shape more clearly in 2026.
Overall, the study implies that investors who closed transactions in the recent period may still realise favorable results through yield compression, though the immediate path to high profitability hinges on market stabilisation and credit conditions improving gradually in the coming years.