SPR/IPF European Property Outlook, Wednesday 14 September 2022
Cushman & Wakefield, 125 Old Broad Street, London, EC2N 1AR

Time to pivot?
At the Society’s first face-to-face seminar of the Autumn, Sabina Reeves of CBRE Global Investors admitted that this was a very difficult time to be presenting a real estate outlook for Europe, with so many aspects of the market reaching a ‘pivot point’.  Capital markets are being hit by substantial interest rate rises after 15 years of a ‘privileged position’ for investment, presaging an end to cheap money, while the world’s economies appear to have passed peak-globalisation.  At the same time inflation is increasing the cost of meeting the ESG agenda, and technology has also brought occupational markets to a pivot point, with the result that retail and office space is now ‘effectively infinite.’

For Reeves, the implication is that investment choices could benefit from following demographically based structural plays across the continent, including logistics, residential, ‘next generation’ sectors such as life sciences, sustainable mixed use and ‘smart, amenitised offices.’ She also suggested that near-term market volatility could bring long-term opportunities, while the listed market appears good value, having been ‘oversold.’

Innes McFee of Oxford Economics had painted a picture of short-term economic pain in his opening presentation, with the prospect of recession for Europe in the first half of 2023 almost certain given the escalation of gas prices over the month before the seminar. The precise impact of the energy crisis would depend on climate conditions through the winter – a cold winter would bring the need for detrimental ‘hard rationing,’ while a warm winter should see gas prices fall. Supply chain problems are generally easing, but labour markets are likely to be the key area of concern, with central banks determined to clamp down on inflation whatever the cost to the economy in the short term.  Still, McFee predicted that the recession should be relatively short-lived compared to that of 2008-9.

Joining the panel discussion led by Mark Callender of Schroders, James Chapman of Cushman & Wakefield acknowledged that as a capital markets representative, he is ‘hard-wired to be positive.’ He observed that there is still activity in the market place, while occupiers are sending an increasingly clear message about their needs for investors to focus on. Changing interest rate expectations should not come as a surprise, he suggested, and investors should have had a strategy in place for this for a long time now.

Kiran Patel, CIO at Savills Investment Management, also on the panel, suggested that the outlook could be glass half empty or glass half full. Most are prepared to accept that real estate goes through cycles, and we are now seeing the inevitable adjustment after a long upswing.  Positively, real estate has not overbuilt this time around, but the new level of interest rates could find a lot of owners with difficulties refinancing once funds terminate.  Nevertheless, some sectors such as logistics should remain strong.

In the subsequent audience Q&A, Reeves proposed that real estate may not be as good a hedge against inflation as many believe, because indexation is lease-dependent and there are often caps in place; moreover, residential rents are likely to be subject to growing political and regulatory constraints.  Innes expected wholesale gas prices, one of the main drivers of inflation, to fall by around 20% in 2023, with alternative energy sources for electricity generation, such as nuclear in France, playing an increasing role.  He also noted that wage expectations are relatively limited in Europe compared to the US, hopefully meaning that inflation is less entrenched.

Asked by Callender whether there is still potential for diversification across European markets, the consensus of the panel was affirmative, although Patel suggested that the large quantities of rapidly produced data that are now available means that differences in national returns tend to be in basis points rather than percentages.  Chapman emphasised that Germany was going through a ‘shell-shocked’ phase, with the safe haven status of its markets brought into question.  Reeves concurred, proposing that there could be big differences in country performance in the near-term, which would mean that investors need a strong ‘energy narrative’ to steer a good course.  She also noted it was not inconceivable that the UK might face a balance of payments crisis over the next few years, a risk that many investors may have pushed to the back of their minds.

Tim Horsey