A panel of real estate experts suggests that 2023 shouldn’t be a year on the sidelines for property professionals, but rather an opportunity to build for future success.
A swathe of outlook reports published in November and December of 2022 painted a fairly brutal outlook for the real estate industry in Europe. With interest rates yoked to soaring inflation – and with no end in sight at the time – market watchers spoke of a ‘wait and see’ era in 2023, before a potential uptick in 2024.
However, real estate’s resilience continues to surprise and impress as we round out the first quarter of the new year. Three months is a long time in economics, and hitherto gloomy views have been tempered by greater clarity about macroeconomic markers, and thus the potential trajectory of dealmaking in 2023.
Interviewed by PropertyEU for this new and revised look ahead, Hans Vrensen, managing director, head of research & strategy at AEW in Europe, said: ‘There is definitely some positive news or at least a moderation of the negative news.
‘Initially, when we looked at different scenarios, we had a base case that showed a shallow and short recession, versus a downside scenario with a deeper and longer recession. For the moment, the good news is that we are becoming more comfortable with our base case scenario – recent news indicates that we are leaning into a macroeconomic environment that isn’t as bad as we previously feared.’
Speaking a day after the February interest rate rises in Europe and the UK, when both the European Central Bank (ECB) and the Bank of England lifted rates by another half a percentage point, Vrensen said that clarity meant hope: ‘While further rate hikes are anticipated, the bond markets are arguably now getting more certainty around the direction of rate rises as inflation has started to come down.’
Indeed, the ECB has already confirmed that the March rate change will constitute another half percentage point rise, helping investors track the direction of travel. The Bank of England, meanwhile, has forecast that UK inflation will fall sharply over the remainder of the year. The International Monetary Fund predicts that the UK will be the only major economy to contract this year.
Yet even on that front, the starkest predictions are waning. The Bank of England has now forecast a 0.5% decline in output across the UK economy, compared to the 1.5% fall predicted in November.
For real estate investors emboldened by the quicker hardening of values in UK markets, tacking between a technical recession and tempered inflation makes for a pretty pragmatic dealmaking environment.
Despite this positive note, other experts interviewed for this feature still warn that plenty of uncertainty remains around several of the sector’s moving parts.
‘In my view we have not yet reached the end state of the shifts that have taken place in response to the global pandemic,’ said Arie Hubers, head of real estate sector Benelux, at ING. ‘Covid has accelerated working from home and e-commerce and both have led to new developments and opportunities in the way we work and shop. But we are also still experiencing drawbacks from those same shifts as well.
‘2023 will be a year where we further advance to a new equilibrium with unknown impact on total demand for office and retail space.’
For Hubers, like other experienced property players, issues around ESG will remain of prime importance. ‘The turn from “nice to have” to “must have” has been completed. Real estate financiers will become more demanding on data and actions form their borrowers as in turn the ask from regulators and society at large towards lenders is growing and accelerating.’
Concluding on an optimistic note, Andy Poppink, markets CEO EMEA, JLL said he believed that opportunity lies dormant in the depth of crisis. ‘The main takeaway is that the property sector is amazingly resilient,’ he told PropertyEU. ‘I think that surprises people sometimes looking from outside the industry. The key is using the assets that we have and encouraging their evolution, while taking heart from its global status, its importance to our societies.’