06. October 2023

Get a foot in the door in 2024 – The mood at Expo Real 2023

Image source: Expo Real

The Club Estate Team participated in Expo Real 2023, Europe’s largest Real Estate Fair. It is one of the key events to assess the current state of the real estate market. The mood at the event was marked by caution and insecurity mixed with some optimism for 2024 and beyond. As one friend puts it “38 000 real estate people here and nobody wants to invest”.

Where does the market stand today? 

Real Estate markets are currently navigating the challenge of absorbing the highest and fastest interest rate hikes. While core inflation is trending downward and the overall consensus is that interest rates have reached their peak, core inflation remains too high and interest rates could, therefore, stay higher for longer.  This significantly affects real estate pricing, transaction activity, and financing conditions.  

Real Estate repricing: The repricing is notable across all sectors. In Europe, logistics and offices have experienced the strongest yield decompressions since the 2022 peak, with a 140 bps increase.  Multifamily, hotels, and retails are following with 100 bps, 70 bps, and 60 bps, respectively. Are these yield decompressions fully reflecting the current interest rate environment? Well, it depends... on the asset class, the location, and the asset-specific characteristics. 

Transaction activity: In this period of adaptation, transaction activity has reached lows not seen since the GFC. In 2023, activity is forecasted to be down by 50% year-on-year. Markets should nevertheless rebound 5% to 10% in 2024. This trend is true for all asset classes, but logistics which benefits from strong fundamentals.  

Financing conditions: Unlike the GFC, where borrower defaults and asset repossessions were common, lenders in today's market are generally averse to taking assets back. Instead, they are more inclined to work with borrowers through loan extensions and collaborative strategies. On new acquisitions, lenders are cautious and favor lending in prime assets with strong ESG credentials. 

Where are the opportunities? 

We see attractively priced opportunities for all cash transactions with no need of immediate financing. It is a time to be selective. There will be significant divergence in asset performances. We see interesting opportunities in logistics, multifamily and student housing, office, and real estate debt. 

Logistics: This segment is thriving due to strong tailwinds and resilient market liquidity. The rise of e-commerce and the increasing need for efficient supply chain management have positioned logistics real estate favorably. The absence of speculative developments and land scarcity in key locations continue to drive supply-demand imbalances and rental growth. 

Multifamily and Student Housing: Multifamily remains robust, driven by factors such as home ownership unaffordability, vacancy rates, and rental growth. Purpose-built student accommodation in countries like Germany and the United Kingdom, where international students are significant and suitable accommodations are lacking, presents an attractive niche.   

Office: Despite ongoing debates about the future of office spaces in a hybrid work environment, a "flight to quality" is occurring in the market. Prime office assets that are mission-critical, well-located, and have strong ESG credentials are seen by companies as a way to attract talents and are experiencing higher take-ups and rental growth. Specific assets that have undergone repricing could offer interesting investment opportunities. 

CRE Debt: As banks are cautious on lending practices, alternative lenders are stepping in to bridge the market gap. Real estate debt might be a good risk-adjusted alternative for investors seeking cash-on-cash returns.