UK real estate sector continues to lead European market correction

The UK non-listed real estate sector continues to lead the correction, as capital growth across European markets reaches its lowest level since the global financial crisis. With -11.96%, the UK displayed the weakest total return for the second consecutive quarter, according to the INREV Quarterly Fund Index for Q4 2022, with office, as well as retail, performance falling very sharply, to below -8%. This brings the total correction since Q2 2022 to -16.21%. INREV said the speed of the correction had been abrupt and synchronised across European markets, with capital growth falling sharply to -7.24%, a quarter-on-quarter decline of 523bp. The total return stood at -6.19% in the fourth quarter. Along with the UK, the Netherlands and France also registered notably weaker Q4 performances, at -5.36% and -4.17% respectively, with quarter-on-quarter declines of 469bp and 281bp. Meanwhile, Germany reported a slower decline to -2.97%, down from -1.38% in Q3 2022. Industrial and logistics decline continues The industrial/logistics sector saw a further decline in performance to reach -10.68% in Q4 2022, down from -4.13% in the previous quarter. Relatively high pricing and weaker rental growth expectations drove this sharp deterioration, leaving the sector as the weakest performing for the second quarter in a row. The sharp industrial/logistics correction is evident across all main markets, accelerating in Q4 2022. Meanwhile, retail outperformed the wider market with a more modest negative return of -2.78%. Structural headwinds have brought strong value declines in recent years; hence the impact of the current downturn is less prominent as yields are already relatively high. Total return for residential dipped to -3.58% in Q4, close to that of offices at -3.74%. However, INREV said the structural imbalance between supply and demand in residential, and therefore its greater potential as an inflation hedge, should continue to support the sector. Near-term sentiment remains muted INREV said investor sentiment towards European real estate remains muted in terms of both geography and sector. However, on a net basis, 21% of survey respondents intend to increase allocations to the UK. This could be a result of the abrupt repricing, which presents attractive investment opportunities for both domestic and international investors. The INREV Consensus Indicator Survey revealed that investment sentiment is starting to stabilise for the first time since Russia’s invasion of Ukraine in February 2022, although it is still down significantly. This may be a very early sign that there is a broad consensus on the magnitude and speed of the correction. Iryna Pylypchuk, INREV’s director of research and market information, said: “This quarter’s findings show a clear picture of the steepest decline in performance since the global financial crisis and a correction that is well underway and evident across all markets, with the UK in the lead. “Investors have been expecting a correction, but the more rapid and abrupt repricing we see in the Q4 2022 numbers is welcome news for our asset class. Until we see stability return to the geopolitical environment, ECB forecasts suggest inflation will remain high and further interest rate hikes are expected, leaving downward pressure on performance as we look ahead into 2023. “A bifurcation and varying degrees of risk in different market segments are the key risks, as well as mispricing opportunities in 2023.” To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews Photo © Planet Observer/UIG/Shutterstock