Analysis from the European Central Bank (ECB) has highlighted the importance of real estate investment funds (REIFs) in commercial real estate (CRE) markets across the continent.
The piece, published here, said REIFs provided “a valuable channel of financing and investment in euro area CRE markets, reducing reliance on bank financing and thus diversifying the investor base”. According to the ECB, the net asset value of REIFs trebled in the 10 years following the end of 2012, rising from €323bn to €1,040bn. It added that the value of REIFs’ real estate assets as a proportion of the total value of the European CRE market increased from 20% to 40%.
The report continued: “In the past decade, however, the REIF sector has grown significantly and now accounts for 40% of CRE markets in the euro area. This means that developments in the real estate market and REIFs have become increasingly interdependent. Instability in the REIF sector could therefore have systemic implications for CRE markets, which could in turn affect the stability of the wider financial system (because of financial institutions’ direct exposure to CRE) and the real economy (for example, because of the effects on collateral values and lending).
“Recent empirical analysis for the euro area suggests that REIF activity has implications for prices in residential real estate markets, even though the share of REITs in the total residential real estate market is much smaller than their share in the overall CRE market.”
The piece looked to what it called a ‘deteriorating outlook’ in real estate across the continent, arguing there were ‘clear signs of vulnerability’ due to uncertainty about the wider economy and from money tightening.
‘Mild recession’
This work follows recent research from Abrdn that declared Europe was entering a “mild recession”. The firm’s European Real Estate Market Outlook for the first quarter of this year noted: “Following a sharp drop in real estate values in the fourth quarter of 2022, we now expect a fall in all property total returns of 7% over the year to December 2023. The pace of the yield revaluation phase has been breath-taking. This supports the theory that values could find a floor sooner than previously anticipated, with the listed market suggesting a turning point could emerge as early as the middle of 2023.”
Similar sentiments have been expressed by Knight Frank and BNP Paribas Real Estate. For the latter, Samuel Dueh, head of real estate economics at the firm, said: “The past year saw the most dramatic reset of global financial conditions in recent times. In the space of six months, monetary policies across the world returned to their pre-GFC levels and above. It is unlikely such events will recur in 2023, implying that economies probably face a year of restructuring rather than upheaval.”
He added: “The prevailing mood is one of cautious optimism, reinforced by recent data that shows inflation weakening. It will take another few months of data to confirm a downward trajectory, so some uncertainty remains. Nonetheless, visibility on inflation – and hence interest rates – has improved for 2023, kindling hope the slowdown may be far shallower than had been feared during the second half of 2022.”
