Positive outlook for European real estate in the year ahead

There is a real sense of relief and optimism as the worst of the pandemic is over and real estate remains a favoured asset class, delegates heard at Real Asset Media’s Global Outlook 2022 – Key Trends briefing, which took place online yesterday on the REALX.Global platform.

“We are on the road to recovery, confidence is high and the outlook is positive,” said Thomas Veith, partner – leader real estate/real assets, PricewaterhouseCoopers.  “Our global CEO survey 2022 shows that real estate is the third sector to invest in after private equity and tech.”

As travel restrictions are being lifted there is an expectation that capital flows into European real estate will increase from all regions, particularly from Asia Pacific.

“International capital flows into European real estate have increased to €250 billion, with half coming from the US, which shows that Europe is still very attractive,” said Serge Bacconnier, deputy head Paris office, Berlin Hyp. “This year Asia Pacific investors, who had withdrawn, are coming back so the expectations for 2022 are positive.”

INREV’s 2022 Investment Intentions survey also points to an increase in allocations to real estate, with 40% of new capital targeting Europe. RE professionals plan to be net buyers of European real estate in the next 18 months despite worries about the rise of inflation, the increase in construction costs and the availability of assets.

“The key reason for investing in real estate is the diversification benefit,” said Iryna Pylypchuk, director of research and market information, INREV. “Sentiment is very strong, confidence is coming back and Europe is still seen as a sweet spot.”

Geopolitical tensions work in the sector’s favour too

Even geopolitical tensions, such as the stand-off over Russian troops on the border with Ukraine, work in the sector’s favour as uncertainty always leads to a flight to real assets.

“Real estate markets are confident, even if policy support has peaked and GDP expectations are being scaled back,” said Megan Walters, global head of research, Allianz Real Estate. “Interest rates are likely to stay low and investors will continue to put money into real estate.”

Real estate is traditionally seen as a good hedge against inflation, which is at a 40-year peak in the US, at a 30-year high in the UK and on the rise everywhere.

To get a reliable picture of the situation, as real estate yields are net of inflation they must be compared to real bond rates net of inflation, and a 350bps spread has historically been regarded as the right level.

“Research shows that the current average spread is 515bps, even more in the UK. That’s the difference between what you get in bonds compared to real estate,” Walters said. “So real interest rates would have to move up quite a lot before they make real estate investment less attractive. Therefore we expect investor interest in the sector to continue.”