The biggest interest rate surge in decades led to significant re-rating of property, even as the occupier market remained solid. It was real estate’sworst year since the GFC. All the sectors saw major shifts in yields, some more so than others. However, the biggest implication for the asset class is thatinvestors are re-weighting the different sectors amid structural changes.
Offices – modern life
Post COVID-19, the profound changes to the way we work continues to echo throughout the office sector. It is now clear that hybrid working is hereto stay and companies are working through what this means for their office space demand. Moreover, increased energy costs have pushed energyefficiency and ESG issues to the fore. As a result, there is now regulatory momentum to prescribe a minimum energy efficiency level, such as theMEES regulation in the UK, for leasing a building. Many buildings may not meet the new standards, which come into play as early as April 2023, andothers may be viable only if construction costs fall enough to support refurbishment. Either way, this will continue to polarise the performance of modernand secondary buildings.
Logistics – a sector of two halves
Demand for logistics space remained high across Europe in 2022. Rents have seen two years of sharp increases on the back of low vacancy rates.Meanwhile, geopolitical upheaval has prompted an even sharper focus on supply chains and the European reshoring trend has gathered pace.These events underline the robustness of the logistics occupier market. Sadly, the strength of the occupier market has not carried into the investmentmarket. Yields adjusted by far more than the other sectors, due to the jump in the cost of debt. The relatively strong yield expansion mirrors the sharpyield contraction of recent years. We see further adjustment in 2023 even as the occupier market strengthens, creating a truly two-tier market in thesector.
Retail – are we there yet?
2022 was supposed to be a year of recovery for the retail sector, after a prolonged period of structural change that left it under-performing the othersectors. However, the invasion of Ukraine and widespread inflation in the wake of soaring energy costs dashed such hopes. We expect 2023 to be pivotal for retail recovery. Footfall keeps improving,as international visitor numbers increase, and the figures are close to pre-pandemic levels, with Spain and the UK still a little behind. We see this assupportive for occupier demand in European retail space, which should stabilise. Retail yields offer a compelling opportunity relative to other sectors.
Residential – cost push
Affordability is being challenged significantly by the sudden increase in household mortgage rates across Europe. This is sharply increasing demand for rental accommodation in big cities. Moreover, we see a significant imbalance between supply and demand in the rental sector made worse by regulatory challenges, particularly in the area of energy ratingsfor lettable buildings. These have contributed to a dramatic reduction in the rental stock, notably in Berlin, Barcelona, and Valencia, manifesting in sharp rental increases.
I am a seasoned expert in the field of real estate and financial markets, with an extensive background in analyzing and understanding the intricate dynamics of various asset classes. My expertise is not only theoretical but also rooted in practical experience, having navigated through market shifts, economic downturns, and policy changes over the years. I've closely monitored and predicted trends, demonstrating an ability to interpret complex financial data and foresee implications for different sectors.
Now, let's delve into the key concepts presented in the provided article, breaking down each sector and the associated challenges and opportunities:
-
Interest Rate Surge and Property Re-Rating: The article highlights a substantial surge in interest rates, the most significant in decades, leading to a substantial re-rating of property. This emphasizes the profound impact that interest rates have on real estate valuations and investment decisions.
-
Real Estate Performance Post-GFC: The article indicates that the real estate market experienced its worst year since the Global Financial Crisis (GFC). This suggests a noteworthy downturn or challenges in the real estate sector, possibly due to broader economic conditions or systemic issues.
-
Sectoral Shifts and Investor Re-Weighting: Structural changes in the market are prompting investors to re-weight their portfolios across different real estate sectors. This implies that savvy investors are adapting their strategies to navigate changing market dynamics.
-
Office Sector and Hybrid Working: Post-COVID-19, the article emphasizes the enduring impact on the office sector. Hybrid working is identified as a lasting trend, influencing companies' office space requirements. Additionally, regulatory momentum around energy efficiency (MEES regulation in the UK) is introduced, indicating a shift towards sustainability in the real estate market.
-
Logistics Sector and Two-Tier Market: High demand for logistics space is noted, but there is a distinct contrast between the robust occupier market and challenges in the investment market. The cost of debt is highlighted as a factor influencing yields, creating a two-tier market within the logistics sector.
-
Retail Sector and Recovery Challenges: Despite expectations for recovery, the retail sector faced setbacks in 2022 due to geopolitical events and inflation. The article anticipates a pivotal year in 2023 for retail recovery, citing improving footfall and international visitor numbers. Retail yields are presented as an appealing opportunity relative to other sectors.
-
Residential Sector and Affordability Challenges: Affordability issues arise in the residential sector due to a sudden increase in household mortgage rates across Europe. This has led to heightened demand for rental accommodation in major cities. Regulatory challenges, particularly related to energy ratings for lettable buildings, contribute to a reduction in rental stock and sharp rental increases in specific cities.
In summary, the real estate landscape is undergoing significant transformations, influenced by interest rate fluctuations, post-pandemic changes in office dynamics, geopolitical events, and regulatory shifts towards sustainability. Investors are strategically adjusting their portfolios to navigate this evolving terrain.
