AEW and LaSalle hail 2024 real estate revival

AEW and LaSalle are both anticipating a revival in European real estate in 2024. AEW, which has more than $90bn (£70bn) of assets under management globally, said it had revised its expectations for returns across all prime sectors to 9.2% pa for 2024-28 in a clear positive for European markets. The UK was ranked top in its European Outlook for 2024, released today, with projected total prime returns of 10.7% pa average across all sectors. Germany was top for relative value but was also facing the largest refinancing challenge. France was in line with the European average and offered solid relative value. AEW’s outlook for prime European offices was positive, but it expected the further bifurcation in pricing between prime and secondary offices to continue. LaSalle, which has $77.6bn of assets under management, said European real estate had begun to acclimatise to higher interest rates and would offer some of the world’s most attractive supply-demand dynamics next year. Both firms highlighted the high and rising constraints on development in Europe. “Nowhere does this apply more than in the residential sector, where the undersupply is chronic, while migration powers long-term demand growth,” said LaSalle in its Insights, Strategy and Analysis Outlook 2024 report. AEW’s outlook is based on the base case scenario that inflation comes down and recession is avoided. However, it cautioned that the heightened geopolitical uncertainty caused by the recent conflict in the Middle East increased the need to consider that higher inflation could return, causing a prolonged economic slowdown. Hans Vrensen, head of research and strategy for Europe at AEW, said: “While it may feel a bit surprising and premature to most investors, as many continue to grapple with valuation declines and refinancing challenges, we expect almost all prime European real estate markets to offer an attractive revival and broad-based cyclical recovery opportunity from 2024. “For the next five years, we project unlevered prime returns of over 9% pa on average across our near 200 European market segments in our base case. Our latest relative value analysis shows a clear positive signal for a cyclical rebound across nearly all European markets. We therefore expect investors to now position themselves as best they can to take advantage of solid returns over the next five years.” Key findings of the AEW report included: Real estate debt to become accretive again from 2025 in the eurozone (where five-year swap rates are projected to come down sooner) and 2026 in the UK. Prime rental growth upgraded as occupier markets remain supportive. With a shortage of new space, coupled with positive GDP growth, AEW’s base case prime rental growth was upgraded to 2.2% pa for 2024-28 across all sectors in Europe (from 2% in March 2023), with prime logistics and residential retaining the joint top rental growth ranking at 2.5% pa. AEW expected a 50% year-on-year drop in European investment volumes to €140bn (£120bn) for 2023, as higher interest rates locked out traditionally leveraged investors and pushed prime yields out. AEW’s base case now predicts a tightening of prime yields with a 20bps for retail and 60bps for offices over the next five years, given recent repricing and lower bond yields. As a result, prime total returns have been revised up to 9.2% pa on average, across all sectors and 196 markets for 2024-28, underpinned by projected yield tightening combined with solid rental growth. Logistics and offices are expected to outperform, generating total returns of 10.4% pa each over the next five years, the highest of all sectors, with retail third at 7.4%. Further, average prime capital value growth across Europe is forecasted to turn positive at 2% in 2024, after a cumulative value decline of 17% to the end of 2023 since peaking mid-2022, despite a few individual markets still showing some downside. LaSalle’s five trends that differentiate Europe: Europe’s city-centre vibrancy and occupier demand have strongly rebounded. The region’s firms and individuals are taking the lead in decarbonisation. Skilled migration is supporting growth. Expansion of the EU’s single market is regaining traction. The high prevalence of inflation-index commercial leases in the EU has helped the region’s property cash flows to better keep pace with inflation. The investment manager said these trends were driving demand in particular for logistics and rental housing, as well as superior performance by offices in the “super-prime” segment. To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews James Veysey/Shutterstock