Marco Kramer – Head of Research and Investment Strategy at Real I.S. AG
Investment in the property market was still restrained in the third quarter of 2023. Many market participants are cautious about real estate investment and are waiting for the end of the current price discovery phase, which will not come before the end of 2023. The coming two years are sure to continue challenging. However, we anticipate the market to recover and prices to stabilise in the second half of 2024 as the economy is expected to grow slightly and the certainty needed for planning in the financing environment improves. The good news is that there are still opportunities for property investments; after all, falling prices offer attractive market opportunities and potential returns for investors prepared to investigate the market carefully. But which types of use are seeing stable demand and show a high level of resilience?
Rental markets offer stability
For those looking for resilient forms of investment, stable rental markets offer a particularly high level of security for the cash flow of the property. This requires more careful examination of the different rental markets. In Europe, there are several countries with solid economic growth and consequently a stronger demand for space. Ireland is an example of such a market: the country’s economic growth was 9.4 percent¹ in 2022 and the economy is not expected to shrink in 2023, in contrast to other European countries including Germany. The International Monetary Fund (IMF) forecasts that the gross national product (GNP) will grow by 2.0 percent in 2023 and 3.3 percent in 2024. The rate is significantly above the anticipated average growth for the euro area (2023: 0.7 percent; 2024: 1.2 percent²) The outlook is also promising for Spain, Portugal and Luxembourg.
It all depends on the type of use
Realistic assessment of the growth of the rental markets requires separate examination of the individual property segments with regard to factors relating to their specific uses. Our expectations for the individual asset classes are as follows:
The residential real estate market shows a stable demand and a shortage in supply
Residential property is always important, regardless of the economic situation. For this reason, this asset class has proved particularly resilient and there remains significant surplus demand, especially in big cities. Demand for residential property is benefiting from the continuing low unemployment rates in the euro area and many companies do not reduce their workforce, despite a weak economy. The slowdown in new building owing to the high cost of financing is exacerbating the supply shortage. As residential property continues to become more expensive, demand has shifted towards apartments for rental. Alternative residential forms, such as student accommodation, micro-apartments or assisted living, are high in demand and can provide stability for portfolios. For investments across the borders, it pays to take a look at the residential market in countries such as Ireland. We see great investment opportunities in this country in future too. We already have a branch office in Dublin, and with our Real I.S. Ireland Residential Fund we are expanding our activities in the Irish residential property market.
The core office property market is further gaining momentum
Energy-efficient and high-quality office properties in central locations with good traffic connections continue to be in high demand. Vacancy rates are still at low levels by historical standards despite the economic slowdown and the increased use of hybrid working models. Employment growth stabilises demand for office space. The unemployment rate was 6.0 percent in the European Union in September 2023, down from 6.1 percent in September 2022³. It is evident that the quality of facilities in office space is becoming more important in giving staff members an incentive to work in the office and in recruiting new staff. This is counteracting the reduction in the amount of space needed, for instance as a result of remote working from home. Excellent location and property attributes are becoming increasingly important. This reflects, for example, the continuing upward trend in prime rents in this segment. At the end of September, the JLL Prime Rent Index stood at 273.3, and thus almost 14 percent above the previous year’s value, for instance. Increases in rental price were between 4.5 percent in Hamburg and Frankfurt am Main and 33 percent in Düsseldorf year on year⁴. However, the boundaries have shifted significantly in relation to the definition of core properties. Environmental, social and corporate governance (ESG) aspects of building performance play an increasingly important role and will become even more decisive for the ‘new core’ in the future.
The logistics sector experiences continued rental growth
At the moment, logistics represents an interesting acquisition due to high discounts on the price in this segment. The low vacancy rates are adding fuel to the fire of higher rents, adding to the attractiveness of this asset class for property investors. According to JLL, the average vacancy rate stood at 4.3 percent in Europe in the third quarter of 2023, compared with 4.4 percent in the second quarter of the current year⁵. In the third quarter, the weighted average rent in Europe grew by 3.0 percent quarter on quarter, and was up by 1.4 percent in the second quarter and 1.8 percent in the first quarter. With the expected economic recovery, commercial enterprises’ share of sales should increase further.
Hotels are recording increasing overnight stays
Hotel property is a particularly promising asset class too. The figures for overnight hotel stays have markedly recovered. In many cities hotel occupancy rates are back to pre-pandemic level. Hybrid and leisure hotels in particular, managed to come out of the crisis rather quickly. Meanwhile hotel prices have surged strongly. According to CBRE, almost all large European markets have seen an increase in average daily room rates (ADR) and in revenue per available room (RevPAR). In Austria, Belgium and the Netherlands RevPAR figures were more than 30 percent higher than in 2022. In France, Germany, Greece and Italy revenue per available room was up by about 20 percent on the previous year’s figure⁶. We intend to use the potential of this segment by means of a specialised hotel fund, as well as a particular focus on business and leisure hotels in selected regions.
In the retail segment, the focus is on local daily-needs providers and retail parks
Brick-and-mortar retail in Europe is seeing a sustained upturn in visitor frequency. However the figures are not yet back to the pre-COVID level. In certain sectors of commerce, sales are increasing, opening up opportunities for market entry in selected areas. We observe a relatively stable trend in the development of local daily-needs providers and retail parks. This makes them an attractive alternative to other retail investments.
¹GDP and Growth Rates - CSO - Central Statistics Office
²World Economic Outlook, October 2023: Navigating Global Divergences (imf.org)
³https://ec.europa.eu/eurostat/documents/2995521/17791746/3-03112023-AP-DE.pdf/7660a79d-0a6f-0fd0-03c8-bfe76b87fbd3
⁴https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/de/Bueromarktueberblick-JLL-Deutschland.pdf
⁵www.jll.de/content/dam/jll-com/documents/pdf/research/emea/jll-european-logistics-market-update-q3-2023.pdf