With a significant undersupply of space in many European real estate markets, especially of Grade A assets, we continue to see scope for significant rental growth for high-quality well-located assets.
Opportunity arises out of volatility, and we expect to see attractive real estate investment opportunities for those able to execute on their conviction strategies in current market conditions.
Increasingly stringent regulations with regards energy efficiency and sustainability are required when leasing assets, and this results in opportunities for institutional investors to reposition less efficient assets to the highest standards.
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.
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.
One important area that we haven’t touched on so far is real estate debt – an asset class that has been thrown into the spotlight by today’s higher interest rate environment.
These loans are typically floating rate in nature. This means the coupon payments increase in line with rising interest rates, making them an attractive option for many investors.
Furthermore, the current market correction is leading to banks taking a more cautious approach to new lending. This is creating an opportunity for alternative lenders to step into the funding gaps left where banks retreat.
We recently financed a hotel in Barcelona, one of our favoured hotel markets. When underwriting the loan, we used a combination of Invesco Real Estate’s hotel and debt expertise.
Located in the city centre in a destination that is a favourite with tourists, the hotel was already performing well. Occupancy was above 90%, and its average rates were above pre-Covid levels.
Given valuation concerns, local banks were restricted to very low loan-to-value ratios. This allowed us to lend at a modest loan-to-value ratio, relative to historic levels, while delivering an attractive return to our capital.
At Invesco, our real estate debt team underwrite opportunities based on real estate fundamentals. They back strong sponsors and partners by financing assets in less traditional property sectors, or where assets have an element of redevelopment or repositioning.
As such, we believe the current retrenchment of the banks away from more alternative real estate sectors will continue to provide attractive opportunities. This is something we will look to capitalise on.
We believe the case for investing in bonds is the strongest it has been since the GFC. Invesco’s experts from across Fixed Income teams and asset classes share their views on the outlook and opportunities.
The 2025 equities outlook is improving. Balance sheets look healthy, and many stocks are attractively valued, though geopolitical risks remain. Find out more.
Our experts unpack the 2025 market outlook on the evolving private credit market. We explore the implications of recent trends on bank loans, distressed credit and direct lending.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Data as at 25 November 2024.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
EMEA4036555
