Market awaits rate changes and a bit of ‘rational optimism’

European real estate data to the end of 2023 were still relatively negative according to Tom Leahy, head of EMEA real assets research at MSCI who said that a bit of “rational optimism” might be what the market needs at the moment.

Talking recently to Real Asset Insight’s Richard Betts he said that deal volumes were down around 50% year-on-year at the end of 2023, which was unsurprising given the 180-degree turn in interest rate policy which was a drag on deal flow.

So far, this year’s numbers don’t look too positive either, Leahy said. However, some of the “mood music” at the recent MIPIM event indicated a little more optimism that we’ll see a pickup in 2024, perhaps in the second half.

“There are green shoots here and there. I think some markets driven by positive fundamentals in the occupier and quite a substantial correction, like parts of the logistics market, have actually picked up a little bit.”

Pricing pressure has also emerged in some of the strongest urban logistics-type markets, for example in London, and price increases have been indicated by transaction price data.

“Central London market liquidity picked up a little bit at the end of 2023, so we’re seeing a little bit of that, but I think with a broader perspective you’d say there’s still a little bit further to go in other sectors of the market which have been slower to revalue,” he said. “There’s a little more pain to come before those sectors start more of a recovery.”

Much of the UK’s revaluation occurred at the end of 2022 that market is ahead and some European markets have not yet been through a revaluation at all.

“I think the hypothesis would be that a more substantial revaluation means that those markets are in a better state to see increased activity as and when buyers start to come back in greater numbers.”

Leahy said much depends on central bankers who were the architects of the last property boom and the lower-for-longer environment which real estate melded itself around.

“As that’s changed it has clearly impacted capital flows. At the moment the market is waiting for some positive signals to start re-engaging.”

“I think the market has been too aggressive in its expectations around rate cuts, really for the last 18 months, so I think you have to temper some of those hopes with a view that people have been too aggressive in expecting those cuts to come through.”

He added that the question for real estate in the medium to long term is where do rates settle and where does that imply property pricing should be in the medium to long term, what’s the risk premium going to be for real estate.”

He said that there has been a very substantial risk premium through the lower-for-longer period.

“Is that going to be compressed? Is that going to maintain at the same level? That has implications for pricing and for the returns that are being demanded by investors from their investment managers?”

“Real estate tends to be an industry for optimists and there hasn’t been a lot of optimism in the industry, he said. “I think a little bit of optimism would assist – obviously not in an irrational way – but I think a little bit of that would help get the market moving again.