Real Estate

Is the European Residential Sector Losing Its Luster?

August 2022 – 9 min read

Although external macroeconomic risks are high and rising, the internal risk to the property market remains relatively modest. The Barings Real Estate team discusses what this means for opportunities in real estate.

Economy
  • High inflation will likely continue this year—while a global commodity price shock for the history books is currently playing out.
  • Central banks, especially the Fed, are in the aggressive tightening phase, as they attempt to wrestle inflation back under control, irrespective of the consequences for growth. But are markets overplaying these fears?
Property Markets
  • A higher cost of real estate debt, a decline in economic sentiment, and lower letting/rental growth expectations are resulting in European property yields beginning to rise.
  • Upward shifts in property yield have begun. Although external macro risks are high and rising, the internal risk to the property market remains relatively modest.
  • Property market mitigators for potential downside risk include:
    • The increasing probability that concerns around rate hikes are easing
    • Low existing vacancy
    • Modest development likely to trend yet lower
    • Chronic shortages of modern stock (especially with strong ESG credentials)
    • Property market leverage that is much reduced compared to previous cycles

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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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