Performance of the European non-listed real estate market was characterized by a continued, slow correction in Q2 2023, in which total returns hit -0.47, driven by a decline in capital growth that dipped to -1.24%, marking the fourth consecutive quarter of negative performance, according to a recent report.

This equates to an overall decrease of -11.58% over the last four quarters, finds the INREV Quarterly Fund Index. However, the broader economic picture reveals some positive signs as inflation continues to decline, albeit projected to remain at notably elevated levels throughout 2023.

The UK delivered the strongest performance – and the only positive result of all main geographies –with a total return of 0.08% in Q2 2023. This was driven by improved capital growth, which rose to        -0.97%, marking the UK’s first positive performance since Q2 2022.

This also reflects the UK’s position in the vanguard of market correction across the European non-listed real estate industry, which has been helped by the stabilization of capital growth since the start of 2023. The Netherlands, the report notes, followed the UK with a total return of -1.29%, a notable improvement from the -3.61% last quarter.

Contrastingly, Germany and France registered weaker Q2 performances in comparison to Q1, at         -1.84% and -1.63%, respectively. Both countries were highly affected by the poor performance of their office assets, and continuously decreasing net sentiment towards offices.

As the ‘sick man of Europe’, Germany’s stuttering economy and negative GDP forecasts, have expanded the real estate correction, putting the transactional market into a standstill until further adjustments in pricing crystalize. Similarly, France has experienced a notable lag in valuations and a lack of transactions, so the latest sharp adjustment in Q2 2023 performance is a move in the right direction.

The industrial and logistics sector leads the correction into positive territory for the UK once again, with a substantial quarterly performance boost to 1.91% – far higher than the -19.70% seen in Q4 2022.

In the Netherlands, the sector also hit a positive return of 0.19% for the first time over the same period.  German industrial assets just squeezed above the baseline at 0.05%. By contrast, in France the sector’s performance remained negative at -0.97%.

Office sector declines

Overall, the performance of the office sector experienced a decline, with returns decreasing and remaining in negative territory across the four main countries within the INREV Asset Level Index. Returns in the UK stood at -4.44% and -3.49% in the Netherlands, followed by -3.32% for Germany and -2.45% for France. Office assets across Europe are experiencing a challenging first half of the year given weak market sentiment and the current harsh economic conditions.

However, there is a significant degree of divergence and variable levels of risk, highlighting the widening disparity in performance between well located environmentally efficient grade-A assets and the more tertiary assets.

While sentiment for residential remains positive on a pan-European level, there is notable market polarity with signs of quarter-on-quarter improvements in the UK (up to 0.00%) and the Netherlands (up to -1.64%), but deterioration in France (down to -0.49%) and Germany (down to -1.67%). Similarly, retail performance improved for the UK and the Netherlands, and worsened, remaining negative, in France and Germany.

The overall trajectory for this segment is nevertheless becoming more optimistic, as it remains in positive territory for the second quarter running, at 1.00% in Q2 2023 on a pan-European level. On a sub-sector level, the retail portrait is more bifurcated throughout markets.

Transaction volumes decrease

Compared with the long-term quarterly average, pan-European transaction volume was down by 38% in the second quarter of 2023, according to MSCI Real Assets. This marks a decline from the already low -30% below the long-term average reported in Q1 2023.

There are multiple factors explaining the decrease in transaction volume, most notably that a lag between valuations and market pricing, meaning investors are sitting on the sidelines. It is expected that transaction volumes will pick up once real estate prices have adjusted further.

The beginning of 2023 marked a clear shift in sentiment and investment plans as inflationary pressures across Europe were past peak, and price adjustments started to give hope for capital market conditions to begin to normalize.

“The latest Q2 2023 results confirm a continuing story of slow correction across the European non-listed real estate market as the lag in valuations and market pricing holds back investors’ decision making,” says Iryna Pylypchuk, INREV director of research and market information. “There’s no indication of structural issues and the wider economic outlook should be cause for cautious optimism.

“As Europe gets a grip on inflation, interest rates begin to plateau and real estate valuations and market pricing correct, investor confidence and transactional volumes will improve, naturally. The key is recognizing that the trajectory of recovery may differ widely not only across markets and sectors, but also across individual assets. This makes sub-sector and asset selection evermore important to the near- to medium-term performance.”