Europe’s Real Estate Market Faces an Uncertain Second Half

August 2, 2022 — London

Strong investment figures for 1Q 2022 tell only part of the story

A rapidly changing economic landscape points to a difficult second half of the year for Europe’s commercial real estate market, according to the latest Cerulli Edge―Global Edition.

Investment into European real estate reached €157 billion (US$160 billion) in the first half of 2022—the strongest ever 1H, according to data published by real estate company CBRE. The growth was driven by an especially strong 1Q. Despite commercial real estate investment volumes of €71 billion by the end of June 2022, this is a nine percent decline on last year’s figure. The fall was the result a slowdown in investment activity due to increased borrowing costs and economic uncertainty.

Cerulli believes there may be further corrections in asset pricing over the next six months, with poorer-quality assets in weaker locations hardest hit and well-located assets with strong environmental, social, and governance credentials likely to outperform.

European property shares experienced a sharp decline during 2Q 2022, with the sector plummeting 29%, nearly doubling the losses of European equities. Pockets of particular concern have been areas where low funding costs over the past decade have left yields low in absolute terms and in some cases below the marginal costs of funding.

“Sentiment around listed European real estate deteriorated significantly over the first half of 2022,” notes Fabrizio Zumbo, director. Counterintuitively, the root cause of that underperformance is linked to inflation. It triggered a hawkish pivot across central banks in Europe, causing yield expansion that challenged not only valuations, but also business models, particularly in high-growth segments such as residential or logistics real estate.

Cerulli’s analysis of the distribution of commercial real estate investments in Europe between 2016 and 2021 by asset class shows that multifamily property investment has risen significantly over the past five years, mostly at the expense of retail.

“Investors are aware of wider economic concerns around inflation and rising rates. Real estate investment trusts tend to reprice six to 12 months ahead of the direct market, with reduced holdings reflecting their sentiment toward the outlook for real estate,” says Zumbo.

The outlook for Europe’s real estate market rests on whether real estate companies will be able to appropriately plan and execute their asset disposal programs without significant discount to book value and also, whether landlords be able to pass on part of the inflation uplift in increased rents.

Other Findings:

  • Close to 60% of the financial advisors in the U.S. are looking to alternatives to generate current income for Baby Boomers who are already retired or are near retirement. A client’s net worth will be a key factor in the choice of alternative product decisions—illiquid, convergence zone, or liquid. Cerulli considers the opportunities and the distribution, and touches on how advisors are competing in this market.
  • The alternative assets market in the Asia-Pacific region is growing at a significantly faster pace than the global average. Cerulli considers the factors driving this growth and how managers can be competitive in this segment.

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Note to editors

These findings and more are from The Cerulli Edge―Global Edition, August 2022 Issue.

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