Acceleration in capital growth drives strong broad-based returns across Europe. Sentiment for the UK turns a corner
8 December 2021, Amsterdam – Total returns for European non-listed real estate funds hit 2.84% in Q3 2021, up from 2.65% in Q2, according to the latest INREV Quarterly Fund Index. Performance was powered largely by strong capital growth of 2.23%, which marks the best result in nearly 15 years.
The INREV pan-European Quarterly Asset Level Index reflected similarly robust performances at an asset level, with a total return of 3.20%, which was also driven by an impressive capital growth of 2.30%. The latest pan-European results reveal a 12-month rolling total returns of 9.80% at the asset and 8.45% at the fund level, well ahead the 3-year rolling annualised averages of 7.14% and 5.52%, respectively.
The results from both indices indicate a strong resurgence in investor confidence towards non-listed European real estate – after the gradual recovery that was first reported in Q3 2020, following the initial impacts of the Covid-19 pandemic.
UK leads broad based recovery across Europe
Most of Europe witnessed a continuing broad-based recovery in Q3, with the UK outperforming all other single country strategies. The INREV Quarterly Funds Index revealed a total return of 3.99% for the UK, the strongest quarterly performance since Q2 2015. This was underpinned by a notable increase in capital growth to 3.39%. On a 1-year rolling basis, UK total returns hit a remarkable 9.66%.
According to the INREV Quarterly Asset Level Index, the UK delivered a total return of 4.28%. The Netherlands continued its recovery after the weak performance at the beginning of 2021, posting 3.56% total return in Q3 2021 on the back of continued strong capital growth of 2.73%. Germany maintained its stable performance with 2.36%, slightly higher than the 2.04% recorded in Q2, bringing the 12-month rolling total return to 11.09% - just above the three-year annualised average of 11.00%.The Nordics posted a total return of 3.92%, followed by Italy (2.56%) and France (2.34%).
The UK recorded the highest deal volume in Europe making it the most liquid market in Q3 – a position it last held in 2019. And, in the INREV Quarterly Sentiment Survey, investors reflected their confidence in the UK and Germany (both at 33%), followed by France (29%).
It is notable that the southern European market saw a resurgence in sentiment, with more investors and investment managers intending to increase weightings to Spain than decrease it, bringing net sentiment to 15%. Sentiment towards Italy was mixed.
Investor appetite for industrial/logistics wanes, but offices back in favour
So far as sectors are concerned, the Q3 results revealed interesting anomalies between performance and sentiment.
The industrial/logistics sector posted asset-level and fund-level total returns of 6.14% and 5.75% respectively, which while slightly down on the previous quarter, kept it in the top spot. However, the INREV Quarterly Sentiment Survey revealed weak appetite for the sector, the first net negative sentiment towards allocations to the sector since the start of the survey in May 2020.
The residential sector hit a solid asset-level total return of 3.36% making it second in both overall quarterly performance and net positive sentiment.
Offices recovered some of the performance lost during the initial stages of the pandemic, posting a welcome uplift in fund-level and asset-level total returns in Q3, at 1.87% and 1.49% respectively, as well as a high volume of direct market transactions. This sector also demonstrated the highest net positive sentiment of all sectors in Q3, with 40% of respondents to the INREV Quarterly Sentiment Survey intending to increase allocations, with none looking to decrease.
Though still the weakest performer overall, the retail sector saw a marked improvement in performance with fund-level total return up from 0.05% in Q2 to 1.82% in Q3, as well as recording capital growth of 1.19%, which is the first time in positive territory since Q2 2018.
These results indicate a shift in investor preferences that may be influenced by a growing sense that the industrial/logistics sector’s performance is reaching its peak and lack of available assets.
Confidence builds, but so does the perception of risk
The INREV Valuations Survey found that only 9% of vehicles applied the ‘material uncertainty’ clause, confirming the ongoing return to normality. This is in sharp contrast to the highest 57% application at the start of the survey in Q1 2020.
Although 62% of respondents to the INREV Quarterly Sentiment Survey indicated no change in their assessment of investment risk compared to the previous period, their share declined. In fact, the remaining 38% of respondents said their assessment of investment risk had increased – up from 12% in the previous quarter.
Iryna Pylypchuk, INREV’s Director of Research and Market Information, said: ‘These results suggest that we’re continuing to see an acceleration in recovery across much of Europe, with particular pockets of outperformance. They bode well for the future as investors and managers move beyond the initial impacts and restraints caused by the Covid-19 pandemic. However, as we look into 2022 it will be interesting to see how the picture unfolds in relation to changing investor sentiment around country, sector and risk preferences.’
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For further information, please contact:
Johlyn da Prato, johlyn.daprato@inrev.org | +31 (0) 621397456
Justin St Clair-Charles, inrevteam@firstlightgroup.io | +44 (0) 7769 644 059
Josie Workman, inrevteam@firstlightgroup.io | +44 (0) 7460 325 392
Notes to Editors
About INREV
INREV, the European Association for Investors in Non-Listed Real Estate Vehicles, was launched in May 2003 as a forum for institutional investors and other participants in the growing non-listed real estate vehicles sector. The association represents and reflects an industry with a total value of €2.8 trillion and INREV members deliver €385 billion of stimulus to the real economy of Europe.
INREV has 475 members which include 115 of the largest institutional investors as well as 40 of the 50 largest real estate fund managers, plus banks and advisors across Europe and elsewhere.
The non-profit association is focused on increasing the transparency and accessibility of non-listed vehicles, promoting professionalism and best practice, and sharing knowledge. It is based in Amsterdam, the Netherlands.