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Real Estate

T(r)ough Times: Have European Property Yields Peaked?

August 2023 – 9 min read

With inflation on the way down, we are likely past peak interest rate anxiety and hopefully close to the trough of the European property market cycle. The Barings Real Estate team discusses what this means for opportunities in real estate.

Economy
  • Inflation decelerated over the second quarter in the U.S. and the Eurozone, an encouraging development for the trajectory of interest rates.
  • The rising cost of living and elevated interest rates have continued to stall economic growth; survey data also indicate softness ahead.
  • Typically, there is a lag between headline and core inflation falling to target.
  • We are now hopefully past peak interest rate anxiety, which has positive implications for real estate market prices.
Property Markets
  • Shifting inflation and interest rate expectations resulted in real estate investment transaction activity plummeting over the past year.
  • While REIT prices remain volatile, they have not meaningfully breached the lows recorded during the height of the energy crisis.
  • The slower pace of decompression could soon encourage buyers back into the market as the trough of the cycle may be in sight.
  • Pricing is not reflected in many valuation-based property indexes yet; this will vary according to local market practice.
  • Office rental prospects remain best for assets with top-rated ESG credentials. Shortages of this type of space will likely intensify in the years ahead.
  • Industrial rental growth traditionally has followed the economic cycle, however, the strength of the e-commerce ‘revolution’ since 2015 has insulated the sector from periods of economic softness.
  • Purpose-built student accommodation (PBSA) product serving high-quality institutions and attracting affluent overseas students who can absorb higher rents remains the most sought after.

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Paul Stewart

Head of U.S. & European Real Estate Research & Strategy

Joanne Warren

Director, Real Estate Research

Benjamin Thatcher

Associate Director

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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