Encouraging signs for property despite third negative quarter

Total returns from European real estate were -0.97% in the first quarter of the year, the third consecutive quarter of negative performance according to INREV, the European Association for Investors in Non-Listed Real Estate Vehicles.

The sector was affected by European governments measures to curb inflation and economic uncertainty which is still affecting property pricing and investor confidence according to the INREV Quarterly Fund Index.

The index showed that it the decline in capital growth -1.47% for the quarter – was behind the negative performance. INREV pointed out that the pace of repricing has slowed significantly and that the figure was a notable increase compared to the -7.23% recorded for Q4 2022.

There has also been positive news on the EU economy, with 2023 GDP growth forecasts revised upwards from 0.8% to 1.0%.

Property prices in the UK appeared to stabilise after shedding more than 19% of market value in the second half of 2022. During the quarter there was negative capital growth of -1.11% and a total return of -0.02%, according to the INREV Quarterly Asset Level Index.

However, the flat economic outlook makes it is too early to call the bottom of the cycle for the UK, INREV pointed out.

Q1 2023 also saw Continental Europe’s continued correction, with all major markets reporting negative Q1 2023 asset-level performance owing to declines in capital growth. The Netherlands’ performance was weakest with a total return of -3.62%, although this was up on the  -5.36% of Q4 2022.

While France delivered a total return of -1.55%, up from -4.19% in the preceding quarter, the figure for Germany was -1.13%, up from -4.06%.

Office assets demonstrated the weakest performance across most markets, including the UK. INREV pointed out that there is a growing gap in performance between environmentally efficient Grade A properties and secondary assets in danger of becoming obsolete without capital expenditure to increase carbon neutrality.

Retail posted positive returns in Q1. UK retail assets made a substantial recovery with a total return of 1.21%, which INREV said is perhaps unsurprising given 12 consecutive quarters of correction between Q2 2018 and Q1 2021. However, in continental Europe, the sector’s performance was mixed with French and German retail assets posting negative performances of -1.79% and -0.34% respectively.

Industrial/ logistics showed early signs of recovery, underpinned by strong fundamentals, and following a sharp correction during the H2 2022, both on the continent and in the UK. Pan-European industrial/logistic assets bounced back to -0.93%, from their record-low of -11.26% in Q4 2022. UK industrial/logistics asset-level returns moved into positive territory with 0.47%.

European transaction volumes decreased further in Q1 2023, totalling €35.2 billion, the lowest level since Q2 2012 (€31.5 billion). However, INREV said this is no surprise as confidence and plans to invest usually precede capital deployment.

June 2023 sentiment results reveal confidence as well as investment plans returning into positive territory. Investment sentiment towards the UK improved, with 26% of respondents indicating an intention to increase net allocations, a rise of 5%, since the last results in March 2023.

Sentiment towards the Netherlands and Nordics is also strong net positive – 15% and 9% – respectively while net sentiment also turned positive for Spain and Portugal. Sentiment towards Germany moved only marginally, turning positive to 3% (0% in March).

Meanwhile, for France net sentiment deteriorated from 13% to 3% and both Core and Fringe CEE remain subject to net negative sentiment, with 19% and 20%, respectively.

“The latest results show an ongoing correction, albeit a notable improvement on the Q4 2022 results,” said INREV’s director of research and market information Iryna Pylypchuk. “ However, this should be taken with a pinch of salt given a very ‘’sleepy’’ transactional market, as well as seasonal and valuation effects.”

She said that we can only speak with more certainty on the state of the market when there is more transactional evidence.