How Rising Rates Are Shaping the European Real Estate Opportunity
Rapid increases in property financing costs mean property yields are now rising. The Barings Real Estate team discusses what this means for opportunities in the European real estate market.
- As Eurozone inflation hits double digits, the ECB continues to ramp up efforts to tame inflation and maintain price stability.
- A winter European recession is now all but inevitable, but any labor market softness is from a position of relative strength.
- Inflation needs to be on a firm downward trajectory before monetary tightening eases—which could potentially be by the end of the first half of 2023.
- Rapid increases in property financing costs mean property yields are now rising. The repricing has been fastest for assets and sectors of the market where the underlying fundamentals are strongest.
- Interest rate levels and property yields will ultimately be determined by whether inflationary expectations eventually settle above or close to target.
- The current property cycle has featured greater banking oversight and a resultant lower use of financial leverage. That means a more modest buying opportunity / price correction than seen in the last cycle still looks more probable.
- Property rental markets are generally characterized by a paucity of high quality modern space. This is another result of restricted bank lending to the sector in the post-GFC era.
- This chronic undersupply of modern space is being exacerbated by rising sustainability regulations, increasing the pace of functional obsolescence. Rental prospects over the mid to long term remain highly favorable, at least for the top end of occupier markets.
- For investors seeking superior risk-adjusted returns, there are increasingly compelling opportunities in European real estate debt.