This month, we turn our attention to the property market as we examine the recent challenging performance of the real estate investment  sector in Europe. We consider whether the worst is now over for this alternative asset class. There is no sugar-coating it, European Property Vehicles have been a terrible investment in recent times having lost -10.5% per annum over the last three years and -8.0% per annum over the last five years. Earnings expectations for the sector have cratered by -25% since January 2020. The pandemic clearly hit the office and retail sectors very badly, while industrial and residential delivered a more resilient performance during that period. However, the recent surge in interest rates has hit REIT investors particularly badly.

November 2023 Insights | Insight Private Clients

After years of underperformance, EU REITs are starting to reflect value. However, as with most assets, we will only know if such potential is delivered, when we are looking back. Whilst appetite is very limited for Property as an investment, since March of this year, many companies  within the sector have turned a corner and have started to trend higher.

Is the worst over for the EU REIT market? Possibly not. Ultimately, global macroeconomic factors will dictate the extent of future price performance for the EU REIT market. Real estate prices and rents tend to be most affected by changes in interest rate and inflation expectations. When rates and inflation are high but falling, REITs have delivered positive returns historically. However, REITs are also positively correlated with the business cycle. So, if recession risks begin to rise, this would be a negative development. A number of headwinds still remain. Once we see recession stories on the front pages of the newspapers, this should mark the turning point for the sector.