Real Estate

European Real Estate: Darkest, Then a New Dawn?

January 2023 – 8 min read

The year ahead likely marks the trough in the property cycle, which will have implications for investment outperformance for years to come. The Barings Real Estate team discusses.

Economy
  • There are tentative signs of easing headline inflation. PMIs are improving, but an economic slowdown is ongoing.
  • With further ECB tightening anticipated and more interest rate hikes on the way, the risks to the outlook remain elevated.
  • The ECB’s response to inflation will influence real estate credit flows (i.e., refinancing risks) and transaction volumes, and thus where property yields settle in 2023.
Property Markets
  • Falling REIT prices and prime yield shifts both point to a 15–20% price correction. This will continue to filter its way into real estate valuations and poor property index performance during the year.
  • The worse impacted sectors so far have been agnostic to long-term fundamentals—rather, this is an interest rate duration impact.
  • Debt LTVs are trending down with pressure on ICRs. A considerable opportunity for non-bank capital sources exists, especially refinancings.
  • The economic slowdown will impact letting activity and near-term rental growth, although this could be mild if the economy proves resilient.
  • Downside risks for property prices are focused on a paucity of bank capital for refinancings, geopolitics, central bank discretion, property’s weight “denominator effects”, and the depth and duration of the economic (rental) slowdown.
  • The year ahead likely marks the trough in the property cycle. This will have implications for investment outperformance for years to come.

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Paul Stewart

Head of U.S. & European Real Estate Research & Strategy

Joanne Warren

Director, Real Estate Research

Benjamin Thatcher

Associate Director

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