Real Estate
European Real Estate: Let the Recovery Commence
The pace of the recovery in the European real estate market will likely depend on variations in debt funding gaps by location and property type. The Barings Real Estate team discusses how this is shaping opportunities across the market.
Economy
- Higher interest rates are set to continue to weigh on households and businesses, yet lower inflation means positive real income growth—and a gradual consumer-driven recovery is still expected.
- Survey data shows that the growth outlook remains finely balanced—strong for the service sector, much weaker for manufacturing.
- Falling inflation supports the ECB’s decision to gradually start reducing interest rates, but only two more cuts are currently expected this year.
Property Markets
- The pace of the property market recovery will likely depend on variations in debt funding gaps by location and property type. The office sector, as well as the German and Swedish markets, could be potential laggards.
- Despite rising vacancy and sluggish letting activity, the occupier flight to quality explains why prime office rents are still rising.
- A consumer rebound driven by real wage growth, higher online costs and fulfilment dissatisfaction, plus historically low new development, potentially supports physical retail demand, but is still no match for e-commerce expansion headwinds.
- The logistics sector slowdown has been largely GDP driven. The green shoots of macro-economic recovery are already here; a revival in occupier activity is likely to follow soon.
- European house prices have proved remarkably resilient to the interest rates shock, partly due to tight labor markets and rising nominal wages, but also a shift to fixed-rate mortgage payments.
