Inrev--the Amsterdam-based European association for investors in non-listed real estate vehicles--stated in its latest report that the European real estate market experienced its sixth consecutive quarter of negative performance in the final quarter of 2023, with a total return of -1.70%. This marks a continuation of the market’s downturn, further declining from the -0.56% performance noted in Q3 2023.
According to Inrev, the primary driver behind this negative trend has been identified as capital growth, which saw a quarter-on-quarter decline of 165 basis points, culminating in a total correction of -15.50% over the period.
Despite the ongoing market correction, there was a notable improvement in income distribution by funds, leading to a distributed income return of 1.13% in Q4 2023, a 52bps increase from the previous quarter, noted Inrev.
Regional disparities
A sub-indicator, the Pan-European Quarterly Asset Level Index, revealed disparities in performance across the main European geographies, with all reporting negative outcomes in Q4 2023. France and Germany, in particular, experienced significant downturns in performance across all main sectors, nearing their weakest performances in the current downturn. Returns in these countries declined by 277bps and 257bps, reaching -3.63% and -4.15%, respectively. This downturn is largely attributed to the frequency of valuations, with France conducting most valuations biannually and Germany adhering to Q4 appraisals.
Sectoral performance
Despite variations, the sharp correction observed in office assets across Europe was strikingly uniform, with a -4.53% return marking the weakest quarter since the index's inception in Q1 2014. Office assets in France and Germany were the worst affected, showcasing significant underperformance.
However, residential assets, albeit still negative, stood out as the strongest performer among the main sectors, with a -0.29% return in Q4. The industrial/logistics sector followed with a -0.92% return, while the retail sector presented a mixed picture, displaying positive returns in the Netherlands (1.2%) but negative outcomes in the UK (-2.04%), Germany (-2.59%) and France (-6.79%).
Transaction volumes
European transaction volumes witnessed a turnaround, increasing to €42.1bn in Q4 2023 and ending a streak of seven consecutive quarters of decline. Although still 26% below the long-term quarterly average of €57.4bn, the improvement indicates a potential market recovery, said Inrev.
Iryna Pylypchuk, director of research and market information at Inrev, commented on the results in the trade group’s report, highlighting a shift towards more positive sentiment but cautioning that it might be premature to consider this a turning point in the cycle. All five Inrev consensus subindicators have shown improvement since December, said Pylypchuk, with economic and leasing subindicators promising a positive rental growth outlook for all sectors except offices.
Pylypchuk also noted the challenges of ongoing pricing discovery and broader financial, economic and political risks, making it difficult for investors to predict the correction’s depth and duration. Looking ahead to the short-term outlook, “over 71% of participants expect Q2 2024 performance to be rental growth driven, while 60% anticipate further expansion of yields,” concluded Pylypchuk.