Primonial REIM real estate convictions : 3rd quarter 2023

Repeated shocks are the main feature of the new cycle we are living through, with the Covid-19 pandemic, the rise in inflation, the war in Ukraine and the threat of escalation in the Middle East. This series of crises has resulted in a reworking of growth forecasts, fuelled inflation on a global scale and increased the level of uncertainty. Even though it is still difficult to assess their economic effects – and the ensuing inflationary pressures – the risks of an escalation of the situation in the Middle East could increase equity market jitters and further depress growth prospects. For the time being, forecasts for global growth remain fairly stable relative to earlier forecasts, at +3.0% in 2023 and +2.9% in 2024.

Although the euro zone economy held up well in the first half, it is likely to remain in the doldrums between now and the end of 2023 due to financing conditions. Eurozone growth is still expected to be positive in 2023 (+0.5%) and 2024 (+0.8%). Looking at the main economies individually, GDP growth in Spain is expected to be +2.4% in 2023 and then +1.3% in 2024, followed by Belgium (+0.9% then +0.8%), France (+0.8% and +0.6%), Italy (0.6% and 0.6%), the Netherlands (+0.5% and +1.3%) and Germany (-0.5% and +0.4%).

The European Central Bank’s Governing Council held policy rates unchanged at their most recent monetary policy session on 26 October 2023. However, the bank will pay particularly close attention to geopolitical risks in the Middle East, with fears over the euro zone’s higher sensitivity to possible increases in oil prices. The ECB has confirmed that it no longer wants to make automatic rate rises at its forthcoming meetings. The institution wants to ensure that rates remain sufficiently restrictive, for as long as necessary, to produce the quickest possible return to inflation at its 2% medium-term target.

On that front, the ECB’s past decisions seem to reach their targets, with inflation coming back under control, having dropped from 8.6% in January to 2.9% by the end of October 2023. This said, there are still significant disparities between individual countries. France, Austria and Italy are still seeing inflation of over 5%. Countries around the average included Portugal and Germany, where inflation was between 2% and 5%. Lastly, inflation was below 4% in Spain, the Netherlands and Belgium.

Quarter after quarter, investors’ wait-and-see approach has constrained the investment market, a direct consequence of higher interest rates and the need to rebuild the real estate risk premium. A new phase will begin given the ECB’s expressed desire to leave policy rates unchanged and thus provide better visibility for investors.

Quarter after quarter, the European investment market has moved sharply downwards and hit its lowest level for 10 years in the third quarter of 2023. Investors’ waitand- see approach held back the market. Investment volumes were low, at around €110 billion of commitments in the first nine months of 2023, against €235 billion over the same period in 2022. It is interesting to observe that the details of allocation shifted towards greater diversification.

Looking at the major countries, investment volumes were just over €29 billion in the UK (down 50% over the year), €20 billion in France (-34%), €19 billion in Germany (-54%), just under €8 billion in Spain (-42%), €6 billion in the Netherlands (-63%) and less than €3 billion in Italy (-69%).

Offices remained the largest asset class, with more than €32 billion or just under 30% of the market, followed by logistics, which saw strong growth to €22 billion (20% of the total market), residential (€21 billion) and retail (€20 billion), representing 19% and 18% of the market respectively, and then hotels (€10 billion, 9%) and healthcare (€5 billion, 4%).

As far as capital flows were concerned, investors concentrated on their domestic markets (58%), which were dominated by institutionals (25%), private investors (21%), tenants (9%) and listed real estate firms (3%). Flows of capital from outside Europe (18%) came mainly from the USA (14%), Canada (2%) and Singapore (2%) whilst cross-border flows within Europe came mainly from France (4%), Germany (3%) and the UK (3%).

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Sources of data: Primonial REIM Research & Strategy, Immostat, CBRE, Savills, BNP PRE, JLL, Knight Frank, MSCI, Oxford Economics, Eurostat, OCDE, FMI, Stabel, NSI, CZSO, DST, Destatis, Stat, CSO, Statistics, INE, INSEE, DZS, ISTAT, CSB, Statistics Lithuania, Statec, KSH, CBS, Statistik Austria, Stat Poland, INE, INSSE, Statistics Finland, SCB, SSB, BFS, ONS, STR, Operators