A report by BNP Paribas REIM gives clues to developments in the various segments of the business, in a context of high interest rates and inflation.
Stagflation and weak investor confidence are affecting the European real estate market. This is confirmed by BNP Paribas REIM’s “The Lighthouse H2 2023 – European Property Market Outlook” report, which notes that real estate markets in Europe are continuing to react to the new environment created by rising financing costs and the price adjustment that began at the end of 2022. These are the seven forecasts to bear in mind between now and the end of 2023.
European investors looking for property value
According to BNP Paribas REIM, the current level of pending transactions does not bode well for a recovery in market activity any time soon, and the price discovery phase could last until 2023. What’s more, the rise in yields could continue until the end of 2023, when central banks are expected to stop tightening their monetary policies to combat inflation. Therefore, in this readjustment phase, investors should pay attention to several factors.
- Concentrate more on liquid markets and understand which sectors to focus on to optimise risk and return;
- Determine the long-term fair value of assets, as the market is likely to remain very cyclical; Be aware of sustainable investments, as property developments must incorporate sustainable practices to be more attractive and profitable in the long term;
- Take into account the obsolescence of assets, not only in relation to climate change, but also in terms of location, function and economy;
- Don’t neglect assets that need minor improvements, as refurbishment can prevent functional or economic obsolescence.
Where are the good opportunities and threats in the real estate market in 2023?
On the other hand, investors should also focus on diversification to reduce portfolio volatility. In this sense, residential and healthcare assets represent good opportunities within this strategy, since they have proved more resilient in the current revaluation phase and should be among the most profitable over the next five years.
In particular, the healthcare market benefits from good long-term demand prospects, driven by macro-trends that will not be affected by the current economic slowdown, such as the ageing of the population or the increase in chronic diseases.
In addition, logistics and hospitality represent high risk/reward options for investors. A recovery in discretionary experiential spending should benefit the tourism industry, and especially the offer focused on health and wellness, such as yoga, meditation or spa resorts, and tourism focused on nature, including camping.
Forecasts for the European real estate market in 2023
Besides, according to the report, the new economic environment that began at the end of 2022 is expected to continue throughout 2023 with high inflation and interest rates. This will delay the recovery of the European real estate market, as it affects financing conditions and investor confidence.
Laurent Ternisien, Chief Client Officer at BNP Paribas REIM, emphasises that investors “are adopting new strategies to adapt and diversify their portfolios”. And they should focus on more liquid markets and sustainable assets “as well as property types driven by macro trends that are immune to the current environment”, such as “an ageing population, urbanisation and increased household formation”.
Taking this into account, the main real estate forecasts for 2023 are:
- Financing conditions will determine the recovery. High inflation and the banking crisis in the US have not weakened the European economic outlook, but lenders and borrowers remain highly risk averse. Thus, debt flows may continue to decline and weigh on investment activity in Europe throughout 2023;
- The European real estate sector has not yet assessed the short-term risks. Yields are rising rapidly to meet the higher costs of debt. In this sense, the UK is the most advanced country in this revaluation phase, followed by the rest of Europe. The timing and peak of interest rates at the Central Bank are still unclear and the risk of large-scale refinancing and repayment of funds could sharpen and prolong the revaluation phase of prime assets;
- Redefine basic investments to avoid blocked assets and secondary markets. Secondary assets can suffer price variations over many years and across all property types. Small but significant parts of the market can run aground and cease to be essential. At the same time, core-plus and value-added investors can identify many assets in established markets that are worth investing in to improve them and make them sustainable;
- Waiting for prime office yields to rise again. Occupancy levels in the European office market are in a much stronger position than in the United States. However, even within European cities, strong micro-localisation is essential. Buyers are waiting for debt costs and share dividends to return to sustainable spread levels. It should be noted that prices should stabilise over the next six to twelve months, but investment volumes will remain at historic lows;
- In search of protection against future recessions. No property category is exempt from appreciation, but the healthcare and residential sectors seem to have held up better, benefiting from long-term macro trends such as demographics. For their part, investors have been more inclined to invest for the long term. Both sectors are demonstrating their potential to reduce portfolio risk in a market that may be characterised by greater volatility in the future. Operator risk remains an important consideration in the healthcare and residential sectors under management;
- The upturn in discretionary spending should favour hospitality. Middle-income families are more likely to spend on experiences. Thus, the tourism sector is on the verge of a full recovery from the pandemic, although budget and medium-sized hotels, especially those that rely on business travel, may continue to struggle. Camping and nature holidays will continue to be very popular, as the sophisticated and luxurious hotels.
Source: Idealista News / “The Lighthouse H2 2023 – European Property Market Outlook” report by BNP Paribas REIM