European non-listed real estate posts worst performance in Q4 since GFC

European non-listed real estate posts worst performance since GFC

The INREV Quarterly Fund Index Q4 2022 reveals a significant downturn in performance, as real estate prices adjust to reflect the weaker economic environment.

Capital growth fell sharply to -7.24%, a quarter-on-quarter decline of -523 bps, the lowest level recorded since the global financial crisis (GFC), says INREV.

European non-listed real estate delivered a total return of -6.19% in the fourth quarter. The speed of correction has been abrupt and synchronised across markets, although levels of decline vary from one geography to another.

With -11.96%, the UK displayed the weakest total return for the second consecutive quarter, bringing the total correction since Q2 2022 to -16.21%. The Netherlands and France also registered notably weaker Q4 performances at -5.36% and -4.17%, respectively, with quarter-on-quarter declines of 469 bps and 281 bps. Meanwhile, Germany reported a slower 139 bps decline to -2.97%, down from
 -1.38% in Q3 2022.

With sectors, there is less dispersion in performance compared to countries, albeit the differences are still notable. The industrial/logistics sector saw a further decline in performance to reach -10.68% in Q4 2022, down from -4.13% in the previous quarter. Relatively high pricing as well as weaker rental growth expectations drove this sharp deterioration, leaving the sector as the weakest performing for the second quarter in a row. 

Meanwhile, retail outperformed the wider market with a more modest negative return of -2.78%. Structural headwinds have brought strong value declines in recent years, hence the impact of the current downturn is less prominent as yields are already relatively high. Total return for residential dipped to -3.58% in Q4, close to that of offices at -3.74%. However, strong fundamentals such as the structural imbalance between supply and demand and thus its greater potential as an inflation hedge should continue to support the residential sector. 

The sharp industrial/logistics correction described earlier is evident across all main markets, accelerating in Q4 2022. The deterioration of the Q4 UK and Dutch office performance, as well as UK retail, is also very sharp, in all cases it feel below -8%.

Near-term sentiment remains muted across geographies and sectors

Investment sentiment towards European real estate remains muted in terms of both geography and sector. On a net basis, 21% of survey respondents intend to increase allocations to the UK. This could be a result of the abrupt repricing, which presents attractive investment opportunities for both domestic and international investors. Sentiment towards France and the Netherlands is also net positive with 13% and 6% of respondents, respectively, indicating their intention to increase allocations to these markets. Germany’s net neutral position this quarter is an improvement after four consecutive quarters of net negative sentiment.

Turning to sectors, the living segment continues to be favoured with residential, student housing and senior living/aged care/health care all being in net positive territory. After three consecutive quarters of negative sentiment, the industrial/logistics sector reversed course with 6% of respondents indicating they intend to increase weighting to the sector. This was aided by the recent sharp repricing, leading to higher yields and more attractive investment opportunities. The latest results confirm the long-term view on the sector and structural shift away from retail.  

Offices experienced a fourth consecutive quarter of negative sentiment with 12% of survey respondents indicating intentions to decrease their weighting, likely driven by investors’ and managers’ ongoing reassessment of the sector in response to hybrid working policies, with European investors most pessimistic.

Reduced European real estate liquidity

At just over €121 billion, the European real estate market experienced a significant (-47%) decline in H2 2022 transaction activity compared to the same period a year earlier, and more than -20% compared to the recent six-month average, according to the latest MSCI Real Assets data. Offices demonstrate an above-average decline in deal volume, a -23% drop in relation to the six-month average over the last four years. On a positive note, the equivalent drop for industrial/logistics is a more moderate -12.5%.  

INREV Consensus Indicator Survey revealed that investment sentiment is starting to stabilise for the first time since Russia’s invasion of Ukraine in February 2022, albeit still down significantly. It may be a very early sign that there is a broad consensus on the magnitude and speed of the correction.

Iryna Pylypchuk, INREV’s Director of Research and Market said: ‘This quarter’s findings show a clear picture of the steepest decline in performance since the GFC and a correction that’s well underway and evident across all markets, with the UK in the lead. Investors have been expecting a correction, but the more rapid and abrupt repricing we see in the Q4 2022 numbers is welcome news for our asset class. Until we see stability return to the geopolitical environment, ECB forecasts suggest inflation will remain high and further interest rate hikes are expected, leaving downward pressure on performance as we look ahead into 2023. A bifurcation and varying degrees of risk in different market segments are the key risks, as well as mispricing opportunities in 2023.’

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