La Française: real estate paying high price for monetary policy

The European real estate market has been hit by the negative effects of the restrictive monetary policy put in place in an effort to bridle galloping inflation, according to research by La Française Real Estate Managers.

“The Ukraine and Russia war is just one of the factors contributing to inflation, leading to higher commodity, food and energy prices, but it’s not the only reason,”said Virginie Wallut, director of real estate research and sustainable investment, La Française Real Estate Managers.“Even prior to the Ukraine invasion, inflationary pressures were building up.”

Historically high government spending plans during the Covid crisis to support economic growth led to massive excess savings and very high employment ratios across the globe.

“Once the world reopened, the excess savings led to a demand shock which in turn led to inflation,” Wallut said.

For the European commercial real estate market, the increase in risk-free interest rates translated naturally into higher real estate yields which to some extent were compensated by the indexation of rents on inflation for commercial real estate, as is the case in many European countries.  

In Europe, the volume of commercial real estate investment over the year 2022 reached a total of nearly €245 billion at the end of December 2022. Investment volumes were down slightly (-4%) year-on-year due to a particularly sluggish 4Q.

“Indeed, investors showed a marked wait-and-see attitude, due to a lack of convergence between sellers and buyers on prices, particularly for asset classes where yields were the lowest,” said Wallut.

However, the decline in overall investment volume in Europe conceals contrasting trends by country: the significant decline in Germany (-17%) and the United Kingdom (-5%) masks a slight increase in volume in France (+2%) and more pronounced increases in Belgium (+115%), Spain (+35%) and Ireland (+20%).

Another notable feature of the current market is that, given the higher cost of financing, debt investors have been driven out of the market, Wallut said, creating opportunities for equity investors.