Third quarter of negative performance for European real estate - Inrev

The result marked the third consecutive quarter of negative fund-level performance for European real estate, according to the Inrev Quarterly Fund Index. Capital growth declines were driving negative performance, however the pace of repricing slowed down significantly, with seasonal and valuation effects playing a role.
 
Despite an overall decline, capital growth reached -1.47% for the quarter, a notable increase when compared to the -7.23% recorded for Q4 2022, Inrev said. This comes alongside some positive news on the EU economy, with 2023 GDP growth revised up from 0.8% to 1.0%, according to European Commission.

UK real estate prices appear to stabilise
After shedding more than 19% of market value in the second half of 2022, the UK has seen prices steady, recording a negative capital growth of just -1.11% and a total return of -0.02%, according to the Inrev Quarterly Asset Level Index. However, it is too early to reference the bottom of the cycle for the UK, especially given the flat economic outlook and with Q1 2023 GDP growth below pre-Covid levels.
 
Continental Europe continued to correct, with all major markets reporting negative Q1 2023 asset-level performance, driven by further capital growth declines. The Netherlands once again recorded the weakest performance, with a total return of -3.62%, albeit an improvement from the -5.36% in Q4 2022. Further discussions on the regulations of the Dutch residential market also negatively impacted the short-term sentiment and Q1 2023 performance.
 
Better news came for the French assets, which delivered a total return of -1.55%, up from the -4.19% recorded in the fourth quarter, with a quarter-on-quarter increase of 264 bps. Meanwhile, Germany reported a modest increase from -4.06% in the previous quarter, to -1.13% in Q1 2023, with a quarter-on-quarter increase of 293 bps.

Offices suffer weakest performance
Office assets saw the weakest performance across most markets in Q1 2023, including in the UK where the sector stayed firmly in negative territory with -1.74%. The dispersion in office performance is notable, with Q1 2023 returns ranging from 4.44% for the 90% percentile to -7.69% in the 10th percentile, alongside 1.67% for the UK and -5.59% for continental Europe. This bifurcation demonstrates varying degrees of risk and the growing gap in performance between environmentally efficient Grade A properties and secondary assets in danger of becoming obsolete if capital expenditure is not put into place to help them become more carbon neutral.

Retail posted positive returns in Q1, with UK retail assets making a substantial recovery with a total return of 1.21%. This is perhaps unsurprising, given the twelve consecutive quarters of correction between Q2 2018 and Q1 2021. On the continent, the sector’s performance was mixed, with French and German retail assets posting negative performances of -1.79% and -0.34% respectively.
 
Industrial/ logistics showed early signs of recovery, underpinned by strong fundamentals, and following a sharp correction during the H2 2022, both on the continent and in the UK. Pan-European industrial/logistic assets bounced back to -0.93%, from their record-low of -11.26% in Q4 2022. It is worth noting that the UK industrial/logistics asset-level returns moved back into positive territory with 0.47%.

Transactional market in a standstill  
As confidence and plans to invest usually precede capital deployment, it is no surprise to see European transaction volumes decrease further in Q1 2023, totaling €35.2 bn. This is the lowest level since Q2 2012, when €31.5 bn was reported according to the latest data from MSCI.
 
However, the latest June sentiment 2023 results reveal confidence as well as investment plans returning into positive territory, likely driven by the correction in pricing and early improvement in the economic outlook for the EU – which may mean transactional market activity will pick up later in the year.
 
Iryna Pylypchuk, Inrev’s director of Research and Market said: 'The latest results show an ongoing correction, albeit a notable improvement on the Q4 2022 results. However, this should be taken with a pinch of salt given a very ‘’sleepy’’ transactional market, as well as seasonal and valuation effects. Only once there is more transactional evidence, can we speak with more certainty on the state of the market. The pricing discovery continues, alongside geopolitical instability, and broader financial and economic risks, which make it even more difficult to foresee the depth and the duration of the current correction.'