Rentals, logistics, and offices are the most affected, but the outlook is still encouraging. Healthcare and residential remain the pillars and investors will now need to pay attention to several factors. These are the conclusions of BNP Paribas REIM's analysis of the real estate sector in the second half of 2023 as reported by idealista.pt.

Access to more expensive and difficult credit

Despite the general improvement in growth in the Eurozone, European real estate markets continue to adapt to the new economic environment, characterised above all by access to credit that is much more expensive than in the past. Furthermore, the price adjustment phase starting in the third quarter of 2022 still limits the expansion of the sector, as it leads many investors to take a wait-and-see attitude: buyers hope to have a clear idea of ​​how the financing costs segment will evolve (waiting for better conditions to arrive), while sellers try to have a less cloudy pricing environment.

All of this caused a widespread drop in investment, which began in mid-2022, reaching 29 billion euros in the first half of this year, the lowest level since 2012, with data on agreements not yet concluded that do not seem to suggest a recovery at all short term.

The most difficult real estate sectors

The correlation between general economic conditions and the real estate market can be explained by the specific difficulties that the latter is facing. In particular, no asset in this sector appears to be immune from ongoing repricing due to global and local uncertainties.

  • Logistics, in particular, is the segment that suffered the fastest and most abrupt adjustment in income (+80 basis points compared to the fourth half of 2021). Despite this, investors remain on the sidelines, discouraged by the slowdown in international trade, which, in turn, is holding back demand. Rents are also suffering a contraction, with tenants taking time to evaluate their options, looking for better prices and/or conditions.
  • As for the office segment, the uncertainties surrounding it during the COVID-19 pandemic are more present than ever. The contraction that began in the United States has also spread to Europe, with investors trying to deduce the future through corporate strategies. Furthermore, increasing pressure to curb the lack of use of buildings and their faster depreciation could also push down the value of these assets.

Short and long-term forecasts for the real estate sector

Although the above seems to paint a less-than-encouraging picture, we must consider that this is the short-term perspective. As for the long term, however, the outlook is and remains more positive, so much so that BNP experts believe that logistics will be one of the best-performing asset classes over the next 5 years. In fact, the growth of new occupiers, from a very wide range, is expected to continue in 2024, supporting demand, and as long as it is possible to attract a substantial workforce, which does not cause widespread disposal of buildings, rents will also remain high, with positive consequences for revenues.

As for offices, the latest office data indicates that not only has telecommuting not been adopted on as large a scale as previously thought, but assets in major business districts have proven to be very resilient over the long term, attracting sustained tenant demand. Leases are also expected to grow at around 2% per year, generating good levels of return for main investors.

The retail sector is still adapting to the e-commerce boom and, in general, to the population's new consumption habits. Although the business units in large centres have already been revalued, the prospects for value creation remain uncertain. In fact, the rate of disuse of these assets is still high and many of them have to review their positioning, with the rise in prices and their impact on disposable income, with the pace of sales expected to slow down in the coming months. On the other hand, there are still healthy retailers and prime leases continue to be successful. Furthermore, the strong recovery in tourism should support consumption and the high street sector in prime resorts.

Finally, sectors such as healthcare and residential are also affected by price and profitability adjustments, mainly due to exogenous macroeconomic factors. However, unlike those presented above, these two segments can count on the support of long-term trends that will not be as affected by economic crises, such as the growing average age of the population, urbanisation, and the reduction of household members. "For this reason, we expect healthcare to be the best-performing area over the next 5 years, while residential will have to settle for lower yields over the same period due to slower readjustments and lower capital growth." Despite this, this segment will still be the second best performing segment after healthcare, on a risk-adjusted basis.