The INREV Quarterly Fund Index has revealed a sharp correction in performance for the European non-listed sector in Q3 2022. Total returns fell to -1.60% dramatically down from the 2.61% recorded in the previous quarter, marking the lowest quarterly performance since Q2 2009, when the impact of the Global Financial Crisis was in full effect.

European non-listed real estate performance in Q3 saw a quarter-on-quarter capital growth decline of 429 basis points (bps) to -2.34% as investment sentiment took yet another hit. The sharp correction is driven by the ongoing energy crisis – triggered by Russia’s invasion of Ukraine – leading to record high inflation and substantial, rapid interest rate rises across European markets.

UK hardest hit
Inrev said that while the correction was taking place across almost all markets, the scale of the decline was most acute in the UK where the Q3 asset-level performance hit a significant low of -4.79%. This compares with more moderate falls in performance for other core European markets, such as France (-1.39%), Germany (-1.38%), and the Nordics (-1.30%).

For the majority of markets, quarter-on-quarter declines in performance stood between 280 and 410 bps, however it was significantly higher for the UK, at 844 bps. This reflects the rapid and sharper monetary policy adjustments seen in the UK – recording the highest interest rate rises in more than three decades – alongside the more pronounced real estate cycle, created by frequent valuations in the UK.

Logistics fall from grace 
Across all market and sector combinations, the correction of the previously best-performing industrial/logistics sector strongly stands out, with total returns falling from 4.21% in Q2 to -4.06% in Q3. However, it is no surprise, given many years of consistent outperformance, sharp yield compression, and relatively high rental growth expectations in most geographies.

The decline was most notable in the UK where Q3 industrial/logistics returns hit a low of -6.80% – an underperformance of 288 bps compared to offices, the next weakest sector at -3.92%. In Germany, the difference in performance between the industrial/logistics and office sectors was even more pronounced at 381 bps. However, once pricing levels adjust, the fundamentals should continue to support the sector – underpinned by e-commerce as a megatrend, occupancy rates for industrial/logistics will likely remain relatively stable and high.

Residential was the best performing sector, with Q3 returns staying largely in positive territory across the three largest core markets – UK (0.73%), France (0.59%), Germany (0.37%).