Outlook 2024: less pain ahead, repricing will trigger a rebound

There will be ‘less pain’ in 2024 as repricing will trigger a recovery, delegates heard at Real Asset Media’s European Outlook 2024: Focus on France briefing, which took place recently in Paris.

“We’re still facing valuation adjustments, but we have an optimistic outlook”, said Irène Fossé, Director Research & Strategy, AEW France. “We think that after the 20% repricing we’re set for a cyclical revival due to positive economic growth driving rental growth”.

Government bond yields will be peaking soon, while property yields are expected to come down significantly, by 50 bps over the next five years, according to AEW research.

“This is what is really driving our returns forecasts”, she said. “Total returns, based on rental growth and yield compression forecasts, will be 9.2% over the next five years in prime European markets. Offices and logistics will outperform”.

The message is that the time to invest is now.

The logistics sector will remain healthy, with low vacancy rates, thanks to a combination of steady demand and shrinking supply.

“Demand is lower but still high and there’s a huge drop in supply due to environmental regulations as well as tough financing conditions”, Fossé said.

The office sector will experience the biggest decline in property yields. There is a lot of negativity about offices, especially coming from the US, but in Europe vacancy rates are 8% on average, a third of US vacancy rates, and prospects are encouraging.

“There is uncertainty over future demand because of the working from home trend, and the French government recently announced a 25% reduction in the space they occupy, but on the other hand stock growth will be very limited”, Fossé said.

Projects under construction will be completed, but after that “we believe the number of spec developments will be very much reduced and that will help the market absorb all the space currently available to let”, she said.

Looking ahead, asset values have decreased and there will be debt funding gaps. Most refinancing challenges will be concentrated in the office sector.

“We think 60% of the loans originated in 2019-21 will have refinancing issues”, Fossé said. “This doesn’t mean the borrower will default, but it does mean they will have to renegotiate with their bank. Refinancing will keep us busy in the coming years”.

Most real estate professionals will be glad to see the back of 2023, a difficult year that saw transaction volumes plummet – by 60% to €140 billion in Europe, according to AEW – , liquidity drop and valuations fall.

But they can look forward to a better year ahead. “In mid-2024 capital growth will turn positive again”, she said. “We can see the light at the end of the tunnel”.