The performance of European non-listed real estate dropped significantly to 2.69% in Q2, down from total returns of 4.01 in Q1, according to the INREV Pan-European Quarterly Asset Level Index.
The decline in performance comes as a result of reduced levels of capital growth in the quarter, falling to 1.86% from the 3.15% delivered in Q1 2022. Although remaining in positive territory, this rapid slowdown reflects an equally sharp decline in sentiment and hesitancy among investors and managers as risks mount. Rising interest rates, high inflation, and the energy crisis as the war in Ukraine continues, are just some of the risks market players are currently concerned about.
Weak performance for Germany
German assets demonstrated the weakest performance out of the four main geographies in Q2 2022 with 2.15%, down from the 2.25% recorded in Q1 2022, and 6.38% in Q4 2021. Q2 marked a second quarterly decline for the country, as the economic outlook and changing investor sentiment continued to rapidly deteriorate. The country’s high dependency on energy imports, alongside rising costs and bottlenecks in the manufacturing industry, have had a significant impact on the economy, near-term growth expectations, and investor sentiment.
The downturn in performance is seen across nearly all geographies in Europe, with France and Italy the only exceptions. French asset returns remained stable due to the high return for the industrial/ logistics sector. Italy’s performance was up from the previous quarter, reaching the same level as France.
Although the UK remained ahead of the other main geographies, with a total return of 3.66%, the country reported its lowest return since Q2 2021. Capital growth contributed 2.79% to the performance, largely coming from the industrial/logistics sector, which accounted for 44.5% of the INREV UK Asset Level sub-index.
Increased risks drive rapid shift in sentiment
For the first time since the INREV Sentiment Survey was launched, 100% of respondents expected an increase in risk. Similarly, look ahead, three quarters of respondents expect further slowdown in short-term European real estate performance over the next quarter.
More broadly, the Survey revealed negative net sentiment towards seven out of 10 European geographies. The only two markets in which investors and managers expressed an intention to increase allocations were France and the Netherlands. Spain maintained a neutral sentiment for the second consecutive quarter.
This can likely be explained by the French economy having a higher degree of protection than the rest of its European peers, helped by a functioning nuclear energy sector and less reliance on imported gas from Russia. This does not make it immune to inflationary pressures, but its inflation is currently one of the lowest in Europe. The Netherlands, on the other hand, benefits from its real estate sector composition with residential accounting for 65% of allocations.
Industrial/logistics sector maintains popularity
For another quarter, industrial/logistics maintained top position, with a Pan-European asset level return of 4.21%. However, the sector was not immune to the deteriorating outlook. The latest performance was 206 bps down on the 6.26% achieved in Q1 2022, while the net sentiment for the sector remained negative for the second consecutive quarter (-15%), with 29% of Survey respondents intending to increase allocations, and 14% intending to decrease.
Sentiment towards the residential sector moved into positive territory, however with clear differences across the subsectors. With the possibility of central government intervention in some markets or segments of residential – through tightening of rent caps for example – a closer look and a more granular understanding of different segments of the market is required, particularly as the direction of travel may significantly differ as a result.
Iryna Pylypchuk, INREV director of research and market information, commented: ‘The mounting macro and real estate risks – from the threat of recession and the war in Ukraine, to sky rocketing energy costs, inflation, and ESG-related capital expenditure requirements to preserve value – are drawing caution among investors and managers. We are only now at the turning point, with investors balancing risk and performance expectations, and weighing these into their multi-asset portfolio allocations. The European non-listed real estate market is at the end of its capital growth phase, with all indicators pointing sharply downwards in anticipation of a more rapid correction in Q3-Q4 2022.’
