European markets badly hit but recovery is on the horizon

European real estate markets are suffering the biggest hit but the situation is better than feared and recovery is on the horizon, delegates heard at Real Asset Media’s Global Outlook 2023 – Key Trends briefing, which was held at Nuveen’s headquarters in London yesterday.

Stefan Wundrak, Head of European Research, Real Estate, Nuveen

“We’re in the middle of a pricing correction, transaction volume is down in every region and liquidity is retreating in most markets,” said Stefan Wundrak, head of European research, real estate, Nuveen. “Europeans have been the quickest to respond to changing market conditions, with the UK the first to decline and other EU countries following.”

Europe has suffered the deepest downturn and the highest inflation rates, putting pressure on the Bank of England and the ECB to raise interest rates. Yields, which reached their lowest ever point in mid-2022, have been trending upwards and will continue to do so at least until later this year.

“It doesn’t look like the market is done yet, as higher costs are making debt finance generally non-accretive across Europe,” he said.

Despite the uncertainty, prospects are more positive now than they were a few months ago. “Things are less bad than they looked recently, with record low unemployment, retail sales and order books resilience,” said Wundrak. “Europe is post peak-pessimism.”

In the United States demand growth is positive on a year on year basis for multifamily, industrial and retail but it’s decelerating across all property types. The biggest risk is oversupply and an excess of new stock is putting some stress on the office market.

The Asia-Pacific region is “the least interesting, because not much is happening”, Wundrak said. The risk of recession is very low and the market is stagnating rather than suffering a downturn.

Across the world “real assets have been doing their job”, he said. In 2022 infrastructure, timber, farmland and real estate outperformed and met investor expectations.

This is why global institutions keep increasing their investments in the sector: average target allocations to real estate have steadily increased, from 8.9% in 2013 to an expected 11.1% in 2023, up from 10.8% last year.

The main reason for institutional investors to choose real estate is diversification, followed by risk-adjusted performance, income returns and the inflation hedge element, which has come to the fore at a time of rising prices.

“Our prediction is that there are more value corrections to come,” Wundrak said. “The declines will be relatively uniform across sectors and locations and will be in the 10-20% range, which is significant but not comparable to the GFC.”

There will be more uniformity, as the big differences between sectors that we have seen over the last couple of years are fading away: value corrections will affect all asset classes.

On the positive side, values will pick up again from next year and in Europe, said Wundrak, “continued rental growth is softening the blow and aiding the recovery.”