Real Estate

European Real Estate: Darkest, Then a New Dawn?

January 2023 – 8 min read

The year ahead likely marks the trough in the property cycle, which will have implications for investment outperformance for years to come. The Barings Real Estate team discusses.

  • There are tentative signs of easing headline inflation. PMIs are improving, but an economic slowdown is ongoing.
  • With further ECB tightening anticipated and more interest rate hikes on the way, the risks to the outlook remain elevated.
  • The ECB’s response to inflation will influence real estate credit flows (i.e., refinancing risks) and transaction volumes, and thus where property yields settle in 2023.
Property Markets
  • Falling REIT prices and prime yield shifts both point to a 15–20% price correction. This will continue to filter its way into real estate valuations and poor property index performance during the year.
  • The worse impacted sectors so far have been agnostic to long-term fundamentals—rather, this is an interest rate duration impact.
  • Debt LTVs are trending down with pressure on ICRs. A considerable opportunity for non-bank capital sources exists, especially refinancings.
  • The economic slowdown will impact letting activity and near-term rental growth, although this could be mild if the economy proves resilient.
  • Downside risks for property prices are focused on a paucity of bank capital for refinancings, geopolitics, central bank discretion, property’s weight “denominator effects”, and the depth and duration of the economic (rental) slowdown.
  • The year ahead likely marks the trough in the property cycle. This will have implications for investment outperformance for years to come.

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Paul Stewart

Head of Research & Strategy—Real Estate

Joanne Warren

Director, Real Estate Research

Benjamin Thatcher

Associate Director

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