19 June 2024, Amsterdam – The latest INREV Consensus Indicator, designed to capture market sentiment and turning points, showed a second consecutive improvement with a headline reading of 53.6. This is a notable increase from the 50.2 reported in March 2024 and suggests that the European non-listed real estate market may be close to the start of a recovery. Four of the five sub-indicators now exceed 50, with the economic sub-indicator increasing to 56.1. New development was the only exception at 48.9.
All five sub-indicators improved since March, with the exception of leasing and operations, which declined from 60.2 in March to 58.9 in June. This decline is attributable to a slight retraction in the growth of effective rents and occupancy rates. Despite the decline, leasing & operations remains the strongest sub-indicator, but the figures highlight the growing bifurcation in the occupier markets. The latest results reveal that close to 15% of aggregate portfolios experienced a decline in rents, against 56% with an overall improvement.
Performance dispersion narrows and improves amongst European markets
The Q1 2024 INREV Fund Index reported a total return of 0.00%, an improvement from -1.90% in Q4 2023. The performance turned positive at an asset level, as the Q1 2024 INREV Asset Level Index delivered a total return of 0.41%. This is the first positive result since 2022. Returns improved across all major sectors in all four geographies, with performance dispersion narrowing between key markets. The Netherlands and the UK reported modest positive performances with returns of 1.08% and 0.49%, respectively. Germany and France remained in negative territory at -0.09% and -0.43%, respectively.
At a sector level by country, Q1 2024 returns in the Netherlands were driven by industrial/logistics at 1.98%, followed by residential at 1.30%. In the UK, retail delivered the best performance at 0.83%, while residential returns hit 0.77%. Residential was the lead sector for Germany with returns of 1.10%, followed by industrial/logistics at 0.94% – a notable 392 bps increase from Q4 2023. For the first time since Q3 2022, France's best-performing sector was retail at 0.98%.
Offices remained the only main sector to continue recording a negative performance in Q1 2024. However, European office assets did see a significant improvement (mostly due to seasonal and valuation effects), with a total return of -0.88% after the record low of -4.53% in Q4 2023.
European transaction volumes decline, but near-term sentiment improves
European transaction volumes decreased from €46 billion in Q4 2023 to €33 billion in Q1 2024, remaining below the long-term quarterly average of €57.2 billion. Due to the seasonality effect, transaction volumes were lower in the final quarter of 2023. Although discussions around deal-making are taking place, the actual transaction activity is yet to pick up.
The Investment Liquidity subindicator of the Consensus Indicator rose significantly to 54.1 up from 46.2 in March 2024. This signals a notable shift in sentiment and indicates that transaction activity ought to pick up in the coming quarters. According to the Consensus Indicator, 80% of respondents expect income return to be the key driver of near-term performance, the highest share since the start of the series in March 2022.
Iryna Pylypchuk, Director of Research & Market Information at INREV, said: “European real estate has seen significant levels of repricing, and we see the first notable shifts in sentiment pointing to the fact that the market is close to bottoming out. However, it’s important to recognise that we are not out of the woods yet and that the recovery will be very nuanced.
“The latest ECB cut should not be considered a precursor to further cuts in September and/or December. The next cycle will see a return to fundamentals as the era of low yields driven by artificially low interest rates is over. Outperformance will be focused on stock selection and the timing of the market entry. The speed and nature of recovery will vary notably across different markets and sectors. It will certainly not be a linear journey.”