UK prices stabilising despite third quarter of declines, says INREV

UK prices seem to be stabilising and investor sentiment improving, despite real estate funds across Europe facing a third successive quarter of declines. INREV’s Quarterly Fund Index once again highlighted weak performance for European non-listed real estate in Q1 2023, as governments tried to curb inflation and ongoing economic uncertainty continued to affect European real estate pricing and investor confidence. The total return of -0.97% marked a third consecutive quarter of negative performance, driven by declines in capital growth. However, INREV said the pace of repricing had slowed down significantly, with seasonal and valuation effects playing a role. It added that the -1.47% capital decline was a notable improvement on the previous quarter’s -7.23%. Meanwhile, UK real estate prices appear to be stabilising, recording negative capital growth of just 1.11% and a total return of -0.02%. This is a relatively positive picture, after shedding more than 19% of market value in the second half of 2022. But INREV warned “it is too early to reference the bottom of the cycle for the UK, especially given the flat economic outlook and with Q1 2023 GDP growth below pre-Covid levels”. Iryna Pylypchuk, INREV’s director of research and market said: “The latest results show an ongoing correction, albeit a notable improvement on the Q4 2022 results. However, this should be taken with a pinch of salt given a very ‘sleepy’ transactional market, as well as seasonal and valuation effects.” Offices continued to suffer the weakest performance across Europe, including in the UK where the sector stayed firmly in negative territory with -1.74%. However, it said there was a “notable” bifurcation, with Q1 2023 returns ranging from 4.44% for the 90th percentile to -7.69% in the 10th percentile, alongside 1.67% for the UK and -5.59% for continental Europe. INREV noted: “This bifurcation demonstrates varying degrees of risk and the growing gap in performance between environmentally efficient grade-A properties and secondary assets in danger of becoming obsolete if capital expenditure is not put in place to help them become more carbon neutral.” Retail posted positive returns in Q1, with UK retail assets making a substantial recovery with a total return of 1.21%. While welcome, this does follow 12 consecutive quarters of correction between Q2 2018 and Q1 2021. It added that Industrial and logistics assets showed early signs of recovery, underpinned by strong fundamentals, and had bounced back after the “sharp correction” of H2 2022, both on the continent and in the UK. UK industrial and logistics asset-level returns moved back into positive territory with 0.47%, while the pan-European picture recovered to -0.93%, from a record-low of -11.26% in Q4 2022. Sentiment is also improving, although INREV noted this had caused transactions to slow down even further as investors waited for more opportune moments. European transaction volumes decreased further in Q1 2023, to €35.2bn (£29.9bn) – the lowest level since Q2 2012, when €31.5bn was reported. Investment sentiment towards the UK saw an improvement, with 26% of respondents indicating an intention to increase allocations on a net basis – marking a rise of 5% since the last results were published in March 2023. No respondents are looking to decrease UK allocations. Pylypchuk added: “Only once there is more transactional evidence can we speak with more certainty on the state of the market. The pricing discovery continues, alongside geopolitical instability, and broader financial and economic risks, which make it even more difficult to foresee the depth and the duration of the current correction. “If the global financial crisis is a reference to judge by, we may expect a few quarters of temporary lull before further corrections take place.” To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews