In this seventh edition, “The Lighthouse H2 2023 – European Property Market Outlook”, BNP Paribas REIM presents its outlook for the European real estate market using its in-house forecasts, analysis and the expertise of its local teams. Here BNP Paribas REIM defines its convictions and investment opportunities for the rest of 2023 and beyond.
Stagflation and weak investor sentiment affects the European real estate market
Investors still need to focus on diversification to reduce portfolio volatility. Residential and healthcare assets are good opportunities for this strategy as they have been more resilient during the current repricing phase and should be among the top performers over the next five years. The healthcare market especially, benefits from good long-term prospects for demand driven by macro trends that should not be affected by the current economic slowdown, such as an ageing population or increase of chronic diseases.In addition, logistics and hospitality represent high risk/return options or investors. A resurgence of discretionary spending on experiences should benefit hospitality and in particular hospitality focused of health and wellbeing such as yoga, meditation or spa resorts and nature-based tourism, including camping.
comments Laurent Ternisien, Chief Client Officer for BNP Paribas REIM.
The key findings are:
- Financing conditions will dictate the recovery. High inflation and the US banking crisis have not weakened the European economic outlook, but lenders and borrowers remain extremely risk averse. The flow of debt could diminish further and weigh on investment activity across Europe throughout 2023.
- European real estate still needs to price in short-term risks. Yields are rising quickly to account for higher debt costs. The UK is furthest into this repricing phase, followed by the rest of Europe. The timing and height of peak central bank interest rates is still unclear. The risk of large-scale refinancing and fund redemptions could cause the repricing phase for prime assets to be sharper and extend further.
- Redefining core investment to avoid the stranded assets and submarkets. Secondary assets are likely to see their pricing drift out for many years across all property types. Small, but significant, parts of the market may become stranded and never be core again. Meanwhile, core-plus and value-add investors could find many assets in strong markets worth improving and making sustainable.
- Waiting for prime office returns to add up. The occupier fundamentals of European office markets are in a much stronger position than those of US office markets. However, even within European cities, a strong micro location is essential. Buyers are waiting for debt costs and equity yields to return to feasible spreads. Pricing should stabilise in the next six to twelve months, but investment volumes would stay at extreme lows.
- Looking for protection from future downturns. No property type is exempt from repricing, but healthcare and residential have been more resilient. They benefit from long-term macro trends, such as demographics, and, in turn, investors are committed for the long term. They are showing their credentials for reducing portfolio risk in a market that could see further volatility in the future. Operator risk remains a key consideration for healthcare and managed residential.
- Logistic investment needs careful analysis and quick decisions. Logistics is the top performing sector over the next five years. E-commerce is, however, unlikely to maintain the double-digit rental growth seen recently. Investors, therefore, need to be confident on future rent reversions and that the building’s design and function are sustainable. Strong competition among buyers is likely.
- A resurgence of discretionary spending should benefit hospitality. Mid-to-high income households are spending more on experiences. The hospitality sector is close to a full recovery from the pandemic, although budget and midscale hotels, especially those reliant on business travel, may continue to struggle. Camping and nature-based holidays should remain popular, while upper scale and luxury hotels also should perform well.