Navigating the recovery
Despite various geopolitical events, the prevailing view is that they are no longer having significant global economic effects, with most economies avoiding a hard landing. Additionally, consumer and business confidence indices are edging back up across most of Europe. One reason is that inflation rates in most countries have fallen significantly from their highs and are now stabilised around the target. This paves the way for monetary authorities to start reducing policy rates. Whilst the pace of cuts in interest rates remains clouded in uncertainty, we expect them to settle at a higher level than we have seen in the recent past.
Consequently, as the real estate market recovers from the significant adjustment of the last two years, some of the value destruction observed will be crystallised and the investment landscape that emerges will look different. First, institutional investors responsible for core money in the market have seemingly withdrawn from real estate and rotated back into fixed income. This has implications for turnover of investment activities. Second, with high interest rate debt strategy has become attractive, causing an increase in the number of investors in this segment of the market. Third, investors’ appetite for the living (Residential, Hotel and Student Housing) and niche (Data Centres, and Life Sciences) sectors are growing at the expense of cyclical sectors (Offices and Retail).
The implications of these developments for the outlook of European real estate markets, amidst a renewed economic cycle, is the focus of this report. For the occupational market, overall demand for space in most sectors remains strong but concentrated in specific segments. In the case of Offices, this is in prime assets that are ESG compliant and located mainly in CBDs. The strong demand for Logistics over the pandemic period appears to have tapered off but new Logistic supply remains limited; hence there remains a good balance in the demand and supply dynamics. For the Retail sector, we see an uptick in demand for physical space in the luxury and mid-market segments. These developments, including improved economic conditions, mean we are forecasting above inflation rental growth in prime assets. We believe the investment market has bottomed out and will remain stable until the end of the year. Thereafter we expect values to increase. However, we expect yields to be stickier in coming down than it has been in past recoveries and the desirability of the asset classes shifting in favour of the living sectors. Above all, real estate remains an attractive asset class.
