Private real estate as a whole endured a difficult 2022, with high inflation, rising interest rates and geopolitical volatility among the myriad challenges that pummelled the industry. But nowhere was the struggle more apparent than in Europe, where the regional economy was beset with an energy crisis stemming partly from the Russia-Ukraine war, and consumer confidence hitting an all-time low.
The 2023 Investment Intentions Survey, jointly conducted by the industry organizations ANREV, INREV and PREA and released this week, highlighted the poor performance of European private real estate investments at year-end in 2022: “When looking specifically at Europe, the latest Q3 2022 performance results are the weakest since the global financial crisis, confirming the beginning of a sharp correction and with the expectation of an even deeper value decline in Q4.”
Meanwhile, the EMEA region ranked lowest among markets and sectors when it came to investment activity in Q3 2022. Year-over-year transaction volume in the region plummeted 46 percent during the quarter, compared with 8 percent and 21 percent in Asia and the US, respectively, according to manager Hines’ global 2023 Outlook report. Even senior housing and care, the most hard-hit property type with a volume drop of 44 percent, fared slightly better than EMEA as a region.
In another outlook piece published this week, MSCI noted that, against this backdrop of falling deal volume, pricing expectations will need to adjust significantly in key markets like London and New York for sales activity to pick up again. Through October 2022, the investment research firm calculated a 29.3 percent pricing decline for London and a 10.4 percent reduction for New York would be needed for office transaction volumes to return to normal levels.
Ironically, though, these look-ahead reports had relatively little to say about where the European real estate market is headed this year. From our perspective, being the hardest-hit region could ultimately work in Europe’s favor. The region’s challenges are triggering an earlier real estate correction compared to other geographies, as sellers are more motivated to offload assets and to agree to pricing that will narrow the bid-ask spread that has put many transactions on ice.
In PERE’s upcoming Europe roundtable, which was held in London this week and coverage of which is scheduled to be published in our March issue, participants noted that assets are repricing more quickly in Europe than the rest of the world. Driving some of this repricing is the fact that borrowers in the region are more willing to cut their losses when faced with refinancing at much higher rates than they did when acquiring their properties several years earlier. One executive commented that, in the UK specifically, there are more willing sellers because of the economic turmoil stemming from the ‘mini-budget’ in September and subsequent liquidity crisis.
By contrast, widespread valuation adjustments have yet to occur in the US, which typically is the first geographic market to see widespread repricing, but is still bracing for a recession. The same goes for Asia, which is currently working through its own economic and geopolitical issues. Greater liquidity and clarity on property values will consequently make Europe a more attractive investment destination for overseas institutions.
As the executive observed, “I actually think that Europe did face bigger challenges, but as a result of what’s happened over the last couple of months, is probably seen as the area of the greatest opportunity too.”
So while Europe was the hardest to fall among the three main geographies in private real estate, it is poised to be the first to bounce back. If that is the case, the outlook reports for the region should look significantly brighter in 2024.