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European non-listed real estate performance hit record levels in Q4 2021

Capital growth significantly outstripped previous quarterly postings
Geopolitical uncertainty and rising global inflation signal shift in investor sentiment 

16 March 2022, Amsterdam – European non-listed real estate delivered a record-breaking performance in Q4 2021. The INREV pan-European Quarterly Asset Level Index posted record high quarterly total returns of 4.85%, driven by exceptional capital growth of 3.99%, which accounts for over 80% of the total performance. This represents a one-year rolling total return of 12.89% – well above the annualised three-year rolling total return of 8.02%.

Similarly, the INREV Quarterly Fund Index delivered total return of 4.27%, compared with 2.93% in the third quarter of 2021. Again, capital growth pushed up overall performance hitting a high of 3.18% (74% of the total) – the strongest result at the fund level since 2006. 

Performance improvements across Europe

According to the INREV pan-European Quarterly Asset Level Index, Germany posted the strongest total return in Q4 2021 at 6.33%, with capital growth of 5.62%. At least in part, this outperformance was partially due to stronger annual revaluations typical for Q4, as well as benefitting from the high exposure to the office sector (42% of the Index). The UK saw a total return of 5.91% up from 4.28% in Q3, marking its most robust performance since the inception of the Index in 2014.

Following a weak performance at the start of 2021, the Netherlands recovered robustly with a total return of 5.26% and capital growth of 4.50% – both record levels since the inception of the Index.  France improved its position from 2.34% in Q3 2021 to 3.84% in Q4.

Bounce in all sectors

Pan-European industrial / logistics continued to build on its impressively strong performance in previous quarters with an asset level total return of 7.63%, which equates to a striking 26.8% 12-month rolling total return. This is the best result for the sector since the launch of the INREV pan-European Quarterly Asset Level Index in 2014 and a difficult one to repeat, given the level of yield compression the sector has seen over the last few years, and since the Covid-19 outbreak in particular.

Total return for the residential sector rose to 5.57% in Q4 2021 – up from 3.40% in Q3, delivering a solid 12.80% performance on a 12-month rolling basis. The office sector nearly doubled total return, jumping from 1.56% in Q3 2021 to 3.41% in Q4, bringing its annual performance to 7.82%.  Retail also continued to improve achieving its third consecutive quarterly uplift at an asset level, with a total return of 2.43% in Q4, but the 12 - month equivalent was only 4.51%

Transaction volumes hike

This exceptional performance was reflected in equally strong transaction volumes across European direct real estate markets. According to data from Real Capital Analytics transactions rose from €78 billion in Q3 to €146.2 billion in Q4, bringing the total 2021 European results to €352.1 billion, close to the record level of 2019 and a 37% increase year-on-year. At €60.4 billion, Germany saw a record deal volume of direct investments in Q4, which accounted for more than 50% of its annual activity and more than double the €28.7 billion recorded in the UK. Germany maintains its position as the most liquid European direct real estate market, with €112.5 billion, while the UK retains its second place with €83.7 billion.

Shifting sentiment

The latest performance picture is, however, balanced by a shift in investor sentiment, as reflected in the most recent INREV Sentiment Survey, conducted in early March 2022. The conflict in Ukraine and a hardening of the global macro-economic environment seem to point toward a new phase in the real estate investment market, driving investors and investment managers to re-assess performance expectations and reappraise strategies.

In terms of risk, the share of respondents indicating that their assessment of investment risk has increased jumped to two thirds (67%) compared to 42% in December 2021, and only 5% expect to further decrease their risk. 

Geographically, sentiment toward key markets has also changed, and in some cases, the change is quite stark. The most dramatic shift relates to Germany.  In December 2021, Germany shared the top spot of preferred investment destinations, but it has now slipped to second last on the list with 15% of respondents planning to decrease allocations.  Perhaps unsurprisingly, 29% also anticipate decreasing allocations to Fringe CEE, while for Core CEE overall net sentiment is at -7%. 

Conversely, sentiment toward the UK continued to be positive with 21% of respondents intending to increase allocations. Sentiment for the Netherlands headed into positive territory, with 15% of investors and investment managers planning to increase allocations.  Spain reported a positive net sentiment for the second consecutive quarter since the Survey began in Q1 2020 and investment sentiment for France is also positive, while the Nordics, Portugal and Italy are neutral. 

So far as future overall performance expectations are concerned, 38% of investors and investment managers anticipate real estate performance will be more negative than in the previous quarter, and none expect a more positive performance over the next quarter. However, there doesn’t appear to be any sign of an immediate impact on capital allocations to European non-listed real estate with 81% of respondents planning to invest more or less the same in the asset class as they did in December 2021 and 14% are more confident about increasing their weighting.

Iryna Pylypchuk, INREV’s Director of Research and Market Information, said: ‘The 2021 results reflect a remarkable recovery from the impact of the Covid-19 pandemic, but we should expect the first quarter of 2022 to look quite different. The unfolding conflict in Ukraine has an indirect negative impact through a weaker economic outlook and an even greater build-up of inflationary pressures which is most likely to have triggered the change in sentiment. Our March Sentiment Survey already provides some evidence of changing attitudes. The greater the geopolitical uncertainty, the lower the business sentiment and performance expectations, even for the real asset classes such as non-listed real estate that tend to weather periods of geopolitical uncertainty relatively well. The 70-80% capital growth performance boost we have seen in the last three quarters of 2021 is likely to erode as we look into H1 2022.’

– Ends –

For further information, please contact: 
Johlyn da Prato, johlyn.daprato@inrev.org  | +31 (0) 621397456
Justin St Clair-Charles, inrevteam@firstlightgroup.io | +44 (0) 7769 644 059
Josie Workman, inrevteam@firstlightgroup.io | +44 (0) 7460 325 392

Notes to Editors

INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, was launched in May 2003 as a forum for institutional investors and other participants in the growing non-listed real estate vehicles sector. The association represents and reflects an industry with a total value of €2.8 trillion and INREV members deliver €385 billion of stimulus to the real economy of Europe. 

INREV has 474 members which include 115 of the largest institutional investors as well as 40 of the 50 largest real estate fund managers, plus banks and advisors across Europe and elsewhere. 

The non-profit association is focused on increasing the transparency and accessibility of non-listed vehicles, promoting professionalism and best practice, and sharing knowledge. It is based in Amsterdam, the Netherlands.