Five reasons why European CRE isn’t out of the woods yet
Our view is that European commercial real estate (CRE) is not out of the woods yet, but things are looking better than before the summer.
What you will learn:
- It is no surprise that we expect offices to be the worst-performing sector in Europe with low double-digit value declines. Residential is next, given the mathematical impact of outward yield shift on low yields, although rental growth prospects remain healthy.
- There are five key headwinds that will weigh on a quick recovery: tight credit conditions, rock-bottom sentiment, high debt costs, inadequate risk premia, and stagnant economies.
- A quick bounce back for values looks unlikely next year. Given the extent to which rates have risen and the gradual transmission of those increases to the market because of fixed rates with differing maturity timings, even if the European Central Bank starts to cut policy rates next year, the effective interest rate paid by the market will keep increasing.
Easing financial conditions offer CRE some respite
Our measure of financial conditions has become less restrictive in the US and started to loosen in the eurozone and the UK, reflecting investors' expectations that interest rates have peaked. This should aid the outlook for commercial real estate (CRE) on the margins, although the scale of past rate hikes, sluggish economies, and structural headwinds mean the sector still confronts challenging fundamentals.Find Out More
Geographic allocation alpha makes a comeback in CRE investment
While we expect that sector selection will still be an important component to generating alpha in commercial real estate investment, we think the thematic drivers that are likely to support outperformance over the next decade will require more emphasis on selecting for geography.Find Out More
Too soon to call an end to the house price correction
The UK's house price correction has been mild so far and recent data has indicated the market may be more resilient than we had thought. But we still think the downturn has some way to run.Find Out More
Assessing the work-from-home impact on US office demand
The work-from-home movement has proven it has staying power. As a main driver of the structural shift in the office sector, the disruption from increased work from home is having a lasting impact on office performance. Office net operating income yields will expand significantly this year and we project office capital values will fall by 16.4% in 2023 and by 2.1% in 2024.Find Out More