Real Estate
T(r)ough Times: Have European Property Yields Peaked?
With inflation on the way down, we are likely past peak interest rate anxiety and hopefully close to the trough of the European property market cycle. The Barings Real Estate team discusses what this means for opportunities in real estate.
Economy
- Inflation decelerated over the second quarter in the U.S. and the Eurozone, an encouraging development for the trajectory of interest rates.
- The rising cost of living and elevated interest rates have continued to stall economic growth; survey data also indicate softness ahead.
- Typically, there is a lag between headline and core inflation falling to target.
- We are now hopefully past peak interest rate anxiety, which has positive implications for real estate market prices.
Property Markets
- Shifting inflation and interest rate expectations resulted in real estate investment transaction activity plummeting over the past year.
- While REIT prices remain volatile, they have not meaningfully breached the lows recorded during the height of the energy crisis.
- The slower pace of decompression could soon encourage buyers back into the market as the trough of the cycle may be in sight.
- Pricing is not reflected in many valuation-based property indexes yet; this will vary according to local market practice.
- Office rental prospects remain best for assets with top-rated ESG credentials. Shortages of this type of space will likely intensify in the years ahead.
- Industrial rental growth traditionally has followed the economic cycle, however, the strength of the e-commerce ‘revolution’ since 2015 has insulated the sector from periods of economic softness.
- Purpose-built student accommodation (PBSA) product serving high-quality institutions and attracting affluent overseas students who can absorb higher rents remains the most sought after.
