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Sixth quarter of negative performance for European real estate, but sentiment improves

20 March 2024, Amsterdam INREV’s Quarterly Fund Index confirms an ongoing correction in the European real estate market. The Q4 2023 performance was yet again negative, a total return of -1.70%, and a sharp decline from -0.56% reported in Q3 2023.

Capital growth remained the primary driver of negative performance, at -2.83%. This 165-bps quarter-on-quarter decline marks a sixth consecutive quarter of falling values, bringing the total correction to -15.50%. As anticipated at year-end, a significant rise in income distribution by funds led to a higher distributed income return of 1.13%, a 52-bps increase from the previous quarter. The latest INREV Consensus Indicator, designed to capture market sentiment and turning points, reveals a more positive outlook with a headline reading of 50.21. It is a notable increase from the 41.8 equivalent in December, as sentiment moves above 50 for the first time since we started to monitor market consensus in March 2023.

Germany and France returns dip close to Q4 2022 levels According to INREV’s Pan-European Quarterly Asset Level Index, all main geographies delivered negative performance in Q4 2023. France and Germany witnessed particular downturns with significant declines in performance across all main sectors. German and French total returns slid by 277 bps and 257 bps to -3.63% and -4.15%, respectively, just short of their weakest performances in the current downturn (-4.07% and -4.19%, respectively in Q4 2022). This is largely attributable to the frequency of valuations – in France, most valuations are carried out biannually while in Germany Q4 appraisals are the norm2.

The Netherlands was the best-performing of the main four European markets, delivering a -0.10% total return in Q4 2023. This result was notably helped by positive performances for the retail (1.20%) and residential (0.30%) sectors. The UK followed in second place with a total return of -1.05%, boosted by a slightly positive total return of 0.23% for industrial/logistics.

Despite the differences in performance across major European markets, the sharp correction for office assets is strikingly uniform. At -4.53%, pan-European office assets reported their weakest quarter since the Index's inception in Q1 2014. This represents a significant underperformance compared to

other sectors and a 242-bps quarter-on-quarter decline. French and German offices were the worst performing, with the respective -6.11% and -5.62% Q4 results.

Residential assets emerged as the strongest performer among the four main sectors, with an improved Q4 return of -0.29%. Industrial/logistics followed, with -0.92%. Retail showed a more varied picture, with positive returns in the Netherlands (1.20%) contrasting with the negative results for the UK (-2.04%), Germany (-2.59%) and France (-6.79%).

Drought in European transaction volumes comes to an end European transaction volumes increased to €42.1 billion in Q4 20233. After seven consecutive quarters of declines, this marks the end of the longest run of no rebound in investment activity. Whilst this is a positive sign of markets beginning to recover, it’s still a way off the long-term quarterly average of €57.4 billion.

Iryna Pylypchuk, Director of Research and Market Information at INREV, said: “The latest results show a clear shift towards a more positive sentiment, but it is premature to declare this as a turning point in the cycle. All five INREV Consensus subindicators improved since December. Economic and Leasing subindicators look most promising, supporting a positive rental growth outlook for all sectors but offices.

“Nevertheless, ongoing pricing discovery and broader financial, economic, and political risks continue to make it difficult for investors to foresee the depth and the duration of the current correction. As far as the short-term outlook is concerned, over 71%4 of participants expect Q2 2024 performance to be rental growth driven, while 60% anticipate further expansion of yields.”

¹ A Consensus Indicator of above 50 represents growth, while a reading of 50 represents no change. A reading of under 50 indicates contraction. The further away from the 50 mark the results, the greater the level of change. 
² INREV’s European real estate valuations: understanding and interpreting results, October 2023
³ MSCI Real Assets, March 2024. 
⁴ Participants of INREV Consensus Indicator Survey participants