Stagflation and weak investor confidence are hurting the European real estate market. This is confirmed by the report "The Lighthouse H2 2023 - European Property Market Outlook" by BNP Paribas REIM, noting that real estate markets in Europe continue to react to the new environment created by the increase in financing costs and the price adjustment initiated at the end of 2022. These are the seven forecasts to take into account from now until the end of 2023.
European investors looking for real estate value
According to BNP Paribas REIM, the current level of outstanding transactions does not bode well for a recovery in market activity any time soon, and the price discovery phase could last until 2023. Furthermore, the rise in yields could continue until the end of 2023, when central banks are expected to stop tightening their monetary policies to fight inflation.
Thus, in this readjustment phase, investors should be aware of several factors.
Focus more on liquid markets and understand which sectors to focus on to optimize risk and return;
Determining the long-term fair value of the assets, as the market is likely to remain quite cyclical;
Pay attention to sustainable investments, as real estate developments must incorporate sustainable practices to be more attractive and profitable in the long term;
Take into account the obsolescence of assets, not only in relation to climate change, but also in terms of location, function and economics;
Don't neglect assets that need minor improvements, as renovation can prevent functional or economic obsolescence.
Where are the good opportunities and threats in real estate in 2023?
On the other hand, investors should also focus on diversification to reduce portfolio volatility. In this sense, residential and health assets represent good opportunities within this strategy, since they have proven to be more resilient in the current revaluation phase and should be among the most profitable in the next five years.
In particular, the health market benefits from good prospects for long-term demand, driven by macro trends that will not be affected by the current economic slowdown, such as an aging population or the increase in chronic diseases .
Furthermore, logistics and hospitality represent high risk/reward options for investors. A recovery in discretionary experiential spending should benefit the tourism industry, and especially offerings focused on health and wellness, such as yoga, meditation or spa resorts, and nature-focused tourism, including camping.
Predictions for the European market in 2023
On the other hand, according to the report, the new economic environment that started at the end of 2022 should continue throughout 2023 with high inflation and interest rates. This will delay the recovery of the European real estate market, as it affects financing conditions and investor confidence.
Laurent Ternisien, Chief Client Officer of BNP Paribas REIM, points out that investors "are adopting new strategies to adapt and diversify their portfolios". And they should focus on more liquid markets and sustainable assets "as well as real estate types driven by macro trends that are immune to the current environment" such as "an aging population, urbanism and increased family formation".
Taking this into account, the main real estate forecasts for 2023 are:
Financing conditions will determine recovery. High inflation and the banking crisis in the US have not weakened the European economic outlook, but lenders and borrowers remain highly risk averse. Thus, debt flows may continue to decline and weigh on investment activity in Europe throughout 2023;
The European real estate sector has yet to assess short-term risks. Yields are skyrocketing to meet higher debt costs. In this sense, the United Kingdom is the most advanced country in this revaluation phase, followed by the rest of Europe. The timing and height of the peak in central bank interest rates is still unclear, and the risk of large-scale refinancing and repayment of funds could sharpen and prolong the revaluation phase of blue-chip assets;
Reset basic investments to avoid locked assets and secondary markets. Secondary assets can fluctuate in price over many years and across all types of property. Small but significant parts of the market can become stranded and no longer essential. At the same time, core-plus and value-added investors can identify many assets in established markets that are worth investing in to improve them and make them sustainable;
Waiting for prime office yields to rise again. Occupancy levels in the European office market are in a much stronger position than in the US. However, even within European cities, strong micro-location is essential. Buyers are waiting for debt costs and equity dividends to return to sustainable spread levels. It should be noted that prices should stabilize over the next six to twelve months, but investment volumes will remain at historic lows;
In search of protection against future recessions. No real estate category is exempt from appreciation, but the healthcare and residential sectors seem to have resisted better, benefiting from long-term macro trends such as demography. In turn, investors have been more inclined to invest in the long term. Both sectors are demonstrating their potential to reduce portfolio risk in a market that may be characterized by greater volatility going forward. Operator risk continues to be an important consideration in the healthcare and home care sectors under management;
Investments in logistics require careful analysis and quick decisions. Either way, logistics will be the best performing sector over the next five years. However, e-commerce is unlikely to sustain the double-digit growth of the rental market as it has recently. Thus, investors must have confidence in the future reversibility of rents and the sustainability of the buildings' functionality. Not surprisingly, buyers can be expected to compete fiercely with each other;
The resumption of discretionary spending should favor the hotel industry. Middle-income families are more likely to spend on experiences. Thus, the tourism sector is on the verge of a full recovery from the pandemic, although budget and mid-range hotels, especially those that rely on business travel, may continue to struggle. Camping and nature holidays will continue to be very popular, as will high-end luxury hotels.
Read the full report here!
Source: Idealist
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