More than one interest rate cut and further evidence of a pick-up in transaction activity will be needed to put the market on the road to full recovery.
Amid all the political tumult of recent weeks (elections for the European Parliament, surprise elections in the UK and France, the conviction of a US president), it’s easy to forget one event that does have a direct bearing on real estate: the quarter point interest rate cut by the European Central Bank on 6 June.
Not as spectacular perhaps, and widely anticipated, yet nonetheless a move welcomed with a collective sigh of relief by an industry that has been groaning beneath the weight of continuously rising rates over the past few years. At the same time, however, experts agreed more will be needed to put the wind back in the sails of a market that has hit the doldrums.
'Policy rates remain well into contractionary territory and have further to fall before having any stimulative effect on economic activity more generally, let alone on real estate,’ said one.
‘One cut alone is unlikely to have a material impact on market dynamics overnight, particularly as it’s been long-anticipated, so largely priced in,’ observed another.
‘Don’t cry victory too soon! We know the direction but not the speed,’ commented yet another.
To get an idea of how battered the market is, one only has to look at our Top 100 Dealmakers report. It reveals a 47% drop in transaction volumes over 2023, and, more tellingly, finds that the cut-off point for inclusion in the ranking was below €600 mln, against just over €1 bn in 2021.
Things may slowly be getting better. After a gloomy Q1, April’s numbers suggest that European deal activity ‘may have finally bottomed out 21 months on from the onset of the slowdown in July 2022’, MSCI’s Tom Leahy points out in his analysis. ‘Admittedly, this is growth from a low base and one quarter’s data does not a recovery make, but it does support some of the more positive sentiment that has fed through from various surveys and conversations with dealmakers,’ he says.
Whatever the market circumstances, investors seem to agree there’s one sure-fire strategy – buying and developing residential. Demographics, undersupply and rental growth are some of the key factors driving institutions into the living sector and its many sub-segments. As James Stevens of Aviva Investors puts it: ‘Institutional capital looking for growth and stable yields is now turning to the living sector which, we believe, will become the pillar of pension funds’ real estate allocations over the next 10 years.’
This trend is being seen across Europe, from the Nordics right down to Spain - where all manner of investors and developers are seeking to get a slice of the action, as Robin Marriott found out during site tours of Malaga and Madrid. And for those looking to push the boundaries even further, another new niche is emerging: glamping.
Enjoy the summer!
