May 17, 2023
Performance falls to lowest quarterly level since the Global Financial Crisis
14 December 2022, Amsterdam – The INREV Quarterly Fund Index has revealed a sharp correction in performance for the European non-listed real estate market in Q3 2022. Total return fell to -1.60% dramatically down from the 2.61% recorded in the previous quarter, marking the lowest quarterly performance since Q2 2009, when the impact of the Global Financial Crisis (GFC) was in full effect.
European non-listed real estate performance in Q3 saw a quarter-on-quarter capital growth decline of 429 basis points (bps) to -2.34% as investment sentiment took yet another hit. The sharp correction is driven by the ongoing energy crisis – triggered by Russia’s invasion of Ukraine – leading to record high inflation and substantial, rapid interest rate rises across European markets.
UK leads the correction
While the correction is taking place across almost all markets, the scale of the decline is most acute in the UK where the Q3 asset-level performance hit a significant low of -4.79%. This compares with more moderate falls in performance for other core European markets, such as France (-1.39%), Germany (-1.38%), and the Nordics (-1.30%).
For the majority of markets, quarter-on-quarter declines in performance stood between 280 and 410 bps, however it was significantly higher for the UK, at 844 bps. This reflects the rapid and sharper monetary policy adjustments seen in the UK – recording the highest interest rate rises in more than three decades – alongside the more pronounced real estate cycle, created by frequent valuations in the UK.
Industrial/logistics falls from the top
Across all market and sector combinations, the correction of the previously best-performing industrial/logistics sector strongly stands out, with total returns falling from 4.21% in Q2 to -4.06% in Q3. However, it is no surprise, given many years of consistent outperformance, sharp yield compression, and relatively high rental growth expectations in most geographies.
The decline was most notable in the UK where Q3 industrial/logistics returns hit a low of -6.80% – an underperformance of 288 bps compared to offices, the next weakest sector at -3.92%. In Germany, the difference in performance between the industrial/logistics and office sectors was even more pronounced at 381 bps. However, once pricing levels adjust, the fundamentals should continue to support the sector – underpinned by e-commerce as a megatrend, occupancy rates for industrial/logistics will likely remain relatively stable and high.
Residential was the best performing sector, with Q3 returns staying largely in positive territory across the three largest core markets – UK (0.73%), France (0.59%), Germany (0.37%).
Looking ahead, absolute levels of rents, business models, and occupier affordability will be the key differentiating factors for keeping certain real estate segments more resilient in the difficult operating environment.
Investor sentiment takes another dive
Unsurprisingly, according to the INREV Sentiment Survey, 83% of respondents indicated that their assessment of investment risk had increased – this being the case for the fifth consecutive quarter.
Moreover, the short-term performance expectations for European real estate were increasingly subdued, with 82% of investors and investment managers expecting a further slowdown in performance. Similarly, as a result of deteriorating investment performance and growing risk, nearly half (46%) of respondents to the most recent Survey were less confident about increasing their weightings to real estate.
In the short-term, real estate may look unattractively priced compared to other asset classes. However, while deal flow stalled in Q3, the correction in asset pricing is already beginning to crystalise – especially in the UK – setting up the potential for revival in investor demand later in 2023.
Iryna Pylypchuk, INREV Director of Research and Market Information, commented: ‘This quarter’s findings paint a stark picture, but one that many in the industry have been expecting for several months. The current downturn is much more synchronised geographically, in contrast to the GFC when the UK was some 6-9 months ahead of the continent in terms of repricing. The faster the correction takes place the sooner non-listed real estate will be on an equal footing with the main asset classes, which should help to mitigate the denominator effect. However, until we see stability return to the geopolitical environment, inflation and interest rate paths will remain difficult to assess, leaving downward pressure on performance across most asset classes, including real estate.’
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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 500 members which include 120 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.