Europe Another quarter of negative performance

Capital growth remained the primary driver of negative performance, at -2.83 pct. This 165-bps quarter-on-quarter decline marks a sixth consecutive quarter of falling values, bringing the total correction to -15.50 pct. As anticipated at year-end, a significant rise in income distribution by funds led to a higher distributed income return of 1.13 pct, a 52-bps increase from the previous quarter.

The latest Inrev Consensus Indicator, designed to capture market sentiment and turning points, reveals a more positive outlook with a headline reading of 50.21. It is a notable increase from the 41.8 equivalent in December, as sentiment moves above 50 for the first time since the monitoring started in March 2023. According to Inrev’s Pan-European Quarterly Asset Level Index, all main geographies delivered negative performance in Q4 2023. France and Germany witnessed particular downturns with significant declines in performance across all main sectors.

The Netherlands was the best-performing of the main four European markets, delivering a -0.10 pct total return in Q4 2023. This result was notably helped by positive performances for the retail (1.2 pct) and residential (0.3 pct) sectors. The UK followed in second place with a total return of -1.05 pct, boosted by a slightly positive total return of 0.23 pct for industrial/logistics. Despite the differences in performance across major European markets, the sharp correction for office assets is strikingly uniform. At -4.53 pct, pan-European office assets reported their weakest quarter since the Index's inception in Q1 2014. This represents a significant underperformance compared to other sectors and a 242-bps quarter-on-quarter decline. French and German offices were the worst performing, with the respective -6.11 pct and -5.62 pct Q4 results.

Residential assets emerged as the strongest performer among the four main sectors, with an improved Q4 return of -0.29 pct. Industrial/logistics followed, with -0.92 pct. Retail showed a more varied picture, with positive returns in the Netherlands (1.2 pct) contrasting with the negative results for the UK (-2.04 pct), Germany (-2.59 pct) and France (-6.79 pct). European transaction volumes increased to EUR 42.1 bln in Q4 20233. After seven consecutive quarters of declines, this marks the end of the longest run of no rebound in investment activity. Whilst this is a positive sign of markets beginning to recover, it’s still a way off the long-term quarterly average of EUR 57.4 bln.

The latest results show a clear shift towards a more positive sentiment, but it is premature to declare this as a turning point in the cycle. All five Inrev Consensus subindicators improved since December. Economic and Leasing subindicators look most promising, supporting a positive rental growth outlook for all sectors but offices. Nevertheless, ongoing pricing discovery and broader financial, economic, and political risks continue to make it difficult for investors to foresee the depth and the duration of the current correction. As far as the short-term outlook is concerned, over 71 pct of participants expect Q2 2024 performance to be rental growth driven, while 60 pct anticipate further expansion of yields.
Iryna Pylypchuk, director of Research and Market Information at Inrev