Real Estate
European Real Estate: Structural Reprice, But Secular Trends Endure
Barring capital market events and refinancing risks, the opportunity to invest at or near the bottom of the European property cycle appears close. The Barings Real Estate team discusses.
Economy
- Europe’s economy escaped an energy crisis-induced recession this winter, growth remains positive, and headline inflation is rapidly cooling—albeit core inflation is proving stickier.
- After 15 years of balance sheet repairs and a tightening of regulation and supervision, European banks entered the recent market turmoil on a strong footing.
- ECB rate hikes may exceed market expectations if core inflation remains stubbornly high.
- The U.K. economy appears to be on a slightly divergent path, with weaker growth and stronger inflation due to lingering structural shocks.
Property Markets
- Interest rate hikes have been heavily felt in CRE prices, with value shifts of around -20% and transaction levels down -60% in the past 12 months.
- Negative repricing has been greatest in the lowest-yielding, most sought-after sectors with the best long-term prospects, while the least attractive sectors have outperformed in the downturn.
- Barring capital market events and refinancing risks, the opportunity to invest at or near the bottom of the European property cycle appears close.
- The cost of debt will likely remain high, and investors will need to work harder for returns in the coming cycle. ESG will play a crucial role for investors to extract alpha and avoid obsolescence.
