European real estate shows signs of recovery

Investors in non-listed real estate across Europe are seeing the start of a recovery, according to the latest figures from Inrev. The latest Inrev Consensus Indicator shows a headline score of 55.8, which, the body said, confirmed the much-anticipated recovery for the European non-listed real estate investment market. The score represents the third consecutive quarterly improvement since the indicator first exceeded 50 in March 2024 . At 59.5, the investment liquidity subindicator registered the most significant uptick for the second consecutive quarter, rising sharply from 32 a year ago. The only reading just under 50 is for the new development subindicator, which is at 49.7, despite consistently improving since December 2023. Leasing and operations is the only subindicator to decline, sliding to 56.3 – its lowest ranking since Inrev started to monitor the market consensus in March 2023 – and dropping from first to fourth position. The fall reflects the anticipated bifurcation of the lettings market identified by Inrev in December 2023. Iryna Pylypchuk, director of research & market information at Inrev, said: “European real estate is showing signs of a long-awaited recovery, reflected in both sentiment and the latest performance data. “We are seeing a certain level of rebalancing and the first signs that core capital is returning, both on the equity and the debt side. “Risks remain, however, especially given we are moving into an alpha market where asset selection, operational efficiency, and asset management will play a pivotal role to performance.” According to the Q2 2024 Inrev Fund Index, total returns reached 0.97%, up from 0.02% at the end of Q1 2024. And at 0.17%, capital growth turned positive for the first time since Q2 2022. Positive performance is also underlined by an uptick in transactions volumes, which reached €30.1bn (£25.4bn) for Continental Europe in Q2 2024 – up from €24.2bn in the previous quarter. UK transaction volumes also rose, from €13.1m in Q1 to €14.6bn in Q2 2024. While transaction volumes remain below historic averages for both geographies, improving liquidity suggests growing investor confidence, said Inrev. At an overall sector level, the Q2 2024 Inrev Asset Level Index shows that residential remains the top-performing sector, with a return of 2.37% – a quarter-on-quarter increase of 151 bps. Second is industrial/logistics, with a total return of 1.43%, its highest level since Q2 2022. Retail assets also posted positive returns at 1.01%. Office assets continued to provide a lacklustre performance with a total return of -0.49%, though this still represents a 41-bps improvement from the previous quarter. Inrev said that its Consensus Indicator also suggested early evidence of a rebalancing between the two key sources of debt. Over the last couple of quarters traditional lenders have become more active, it said, up from 14% in June to 19% in September, while alternative lenders have dipped from 41% to 29% over the same period. This potentially reflects a tentative return of core capital to the European real estate market, said Inrev. Views on yield are mixed, but, in the UK, 31% of respondents said they expected further yield compression next quarter. By contrast, market participants in France and Germany expect yield expansion, likely due to a lag in valuations and repricing. Several other markets, most notably the Nordics, Netherlands and Spain, appear to be near the end of repricing. Only 10% of participants anticipate yield expansion in Spain in Q3, a notable improvement from the 33% equivalent for Q2 2024. This aligns with the sharp uptick in sentiment towards the Spanish market this quarter. Image © Pete Linforth/Pixabay