European Real Estate: A new real estate value cycle

There is a quote commonly attributed to Mark Twain which says, “Whenever you find yourself on the side of the majority, it is time to pause and reflect”. It is good advice in general – but perhaps particularly relevant to active investors on the lookout for non-consensus opportunities.

2023 has proven to be a volatile year, and many of the real estate headlines have focused on the price volatility that rising interest rates have created. However, this disruption has already offered opportunities for those who are prepared, and we believe this will continue into 2024.

Investing through corrections has historically driven outperformance and, in our view, this opportunity is set to repeat in 2024 and 2025. We believe that ongoing refinancing pressures and sustainability concerns will continue to drive mispricing in our markets, allowing active investors to benefit from value-creation opportunities for the rest of the decade.

Could 2024 be the next 2014?

As introduced previously, real estate investors have historically benefitted from outsized returns after market corrections. To illustrate this further, let’s take a look at Figure 1.

Using industry data from INREV, the chart shows the five-year returns of “value add” funds in Europe at different start points. As you can see, there is a clear pattern of outperformance for funds that invested in the aftermath of the global financial crisis, and particularly after the euro crisis in 2013. While the below chart focuses on “value add” portfolios, a similar pattern is evident when you look at the five-year returns from core real estate funds too. The analysis below still shows clear patterns of outperformance even when we adjust for yield shift.

This outperformance is driven by a range of factors – not least the ability to benefit from mispricing when transaction volumes are reduced. Furthermore, investors like Invesco Real Estate have the resources needed to reposition assets, if we feel they could benefit from capital expenditure projects. Meanwhile, less experienced owners may lack the confidence to undertake expensive projects during periods of economic turmoil, and instead look to sell.  

We think that 2024 is likely to offer similarly strong performance, and believe that investors can benefit from this by “carefully playing offense”, as outlined by Invesco’s Kevin Grundy in a recent podcast. Kevin is one of our managing directors and looks after European fund management.