High levels of inflation, real estate remaining an attractive asset, and a recovering office sector are set to be the trend for 2023. However, growth is counterbalanced by the last year for double-digit returns. The UK is predicted to show strong growth in 2023 against other countries owing to being further along the peak to trough journey.
High Inflation Continues
Significantly high levels of inflation have swept across European countries in recent months. Thankfully, factors responsible for growth have abated somewhat in the long and medium term. However, production cost increases and resultant wage pressures keep inflation elevated and above the 2% target well into 2023.
Double-digit returns in European commercial real estate market classes have returned over the last two years, thanks to good returns in both bond and equity markets.
The European office market is poised to recover in terms of both investment and occupation. There is the risk of permanent reduction, but this will be limited. Furthermore, a shift in work patterns and also the regulatory environment means that there will be bias towards both ESG compliant and core assets.
Unfortunately, 2022 is set to be the last year where double-digit returns exist in the bulk of markets.
Investors will need to be cautious of the long-term value trap owing to lower yields. Good future rental growth provides comfort for income-driven investors, but value investors have less security.
Nominal Bond Growth and UK Strength
Short-term policy rates and rising inflation means that the value of sovereign bond yields is rising on a global scale. For the first time in three years, the 10yr German bunds turned positive at the start of 2022 – hopefully foreshadowing the growth to come. Unfortunately, real bond yields, widely considered to be a benchmark for real estate yields, remain negative and are expected to continue.
E-commerce penetration and uncertainty surrounding Brexit have led to the UK underperforming in most sectors except for logistics, where it has performed averagely. However, as these issues come to an end, the market has a high-yield relative to Europe’s continental region, and a good opportunity for higher returns presents itself.
The UK is currently outpacing continental Europe in the peak-to-trough journey, meaning that the country will recover earlier than the bulk of European countries.
Within its sector, retail warehousing stands out from the crowd for the resilience shown. However, it is important to acknowledge and take notice of core high street locations which will benefit from strong spending as the COVID-19 hoard begins to dissipate back into the central economy.
