Price discovery phase still in full swing in European property
The price expectations of sellers and buyers are not yet in line with each other, but that does not mean that no transactions are possible, reports Martin Schellein.
The price discovery phase is still in full swing in European real estate markets. Yields are adjusting to the rise in interest rates bit by bit.
However, the price expectations of sellers and buyers are not yet in line with each other. The majority of European real estate investors (55%) currently expect an annual return of 3%-5% on new real estate investments, according to the latest investment climate study by Union Investment, for which 134 real estate companies and institutional real estate investors in Germany, France and the UK were surveyed.
According to the study, 25% of respondents currently calculate a target return of 3%-4%, and 30% of them 4%-5% per year. One fifth (20%) set an annual return of over 6% for new investments.
‘Real estate remains an indispensable component of asset allocation for institutional investors in an inflationary environment.’
Martin Schellein, Union Investment Real Estate
Whether these calculated returns can be achieved remains to be seen. No clear market evidence can be derived from the strongly reduced, fragmented transaction activity.
It is not expected that transaction markets will pick up until next year at the earliest and the price discovery phase will slowly come to an end. According to the Union Investment survey, the majority (60%) of European real estate investors expect investment markets to take longer than 12 months to pick up again and 37% expect the market to pick up significantly within the next 12 months.
Subdued investment mood
The mood in the European real estate markets remains subdued overall.
The real estate investment climate index calculated by Union Investment in Germany, France and the UK also shows a rather mixed picture. While the barometer rose by 2.4 points in Germany in the first half of 2023, it went down in France and the UK. Sentiment deteriorated the most in France, where the index fell by 2 points. In Great Britain, the barometer only slipped by a slight 0.7 points (see chart below).
However, the subdued mood does not mean no transactions are taking place, and the sell-off some market participants feared is not in sight. According to the study, more than half of the real estate investors surveyed want to wait and see in the coming 12 months. They want to hold on to their properties – or even make new investments.
Nevertheless, sales are also being considered by 39% of those surveyed.
Bifurcation of real estate markets
Top properties can still be traded under reasonable conditions, as evidenced by Union Investment’s most recent sale: PSP Real Estate AG acquired the West-Park office building in Zurich from the portfolio of the UniImmo: Global, the open-ended mutual property fund. It is one of the largest office property transactions in continental Europe to date this year.
Completed in 2002, the property at Pfingstweidstrasse 60 had been part of the fund’s portfolio since 2009. Partly because of favourable growth in the value of the Swiss franc compared with the euro, the office building was sold for a profit of around 100%, compared with the purchase price at the time.
In general, a growing dichotomy can be observed in the real estate markets, especially in the office segment. High-quality properties in good to very good locations show higher value retention, while properties in poorer locations and with a need for modernisation are less in demand.
Adversely affected rentability and resulting price adjustments can be observed outside the top segment, especially for offices in peripheral locations and those in need of modernisation.
Once market participants have agreed on a new price structure, a new real estate cycle will start. Until then, it is important to remain calm. Despite the current challenging environment, real estate remains an indispensable component of asset allocation for institutional investors in an inflationary environment.
Around two-thirds of respondents to Union Investment’s investment climate study cited the crisis-resistance and value-preservation functions as the most important characteristics of real estate.
Martin Schellein is head of investment management for Europe at Union Investment Real Estate