Signs of decreasing investments in European real estate

Results of this year’s edition of the ANREV/ INREV/PREA Investment Intentions Survey showed that the gap between current and target allocations narrowed significantly compared to last year’s edition. The gap decreased from 120 basis points in the 2022 report to 20 basis points in this year’s edition. 

The reduction is observed for investors across all regions. However, it is less relevant for APAC investors. On the other hand, European investors are, on average, over-allocated to real estate. 

This gap decrease between the current and target allocations is mainly driven by external conditions such as the monetary policy or the denominator effect. The denominator effect was mentioned by approximately 70% of the respondents as one of the main issues impacting their real estate decisions for 2023. 

However, the fast price correction in the real estate segment should minimize its impact. The denominator effect, alongside the monetary policy issues and the geopolitical risk, pushed investors towards more core strategies. Around 46% of the respondents selected core as their preferred investment strategy when investing in Europe in 2023.

Although the diversification benefit for a multiasset portfolio remains the most important reason when investing in real estate, the inflation hedge ability of real estate has become more relevant for investors. Non-listed real estate debt vehicles are gaining importance among investors as they are looking for less risky strategies. 

More than 60% of the respondents plan to increase their allocation to debt vehicles in 2023. The outcome is even more striking when adjusting the results by AUM, as investors representing almost 80% of the total respondents’ AUM will increase their allocations to non-listed real estate debt vehicles. 

Regarding the top preferred locations and sectors, core European markets and mainstream sectors are the most favored picks for investors in Europe. France and Germany are the preferred destinations for investors, followed by the United Kingdom and The Netherlands. 

At the same time, more secondary locations like Spain, Italy, or the Nordics have seen a drop in investor interest compared to previous years. Office, residential, and industrial/logistics remain the preferred sectors in Europe. Although industrial/logistics remains in the top three preferred sectors, there is a sharp drop compared with last year’s results. This could be driven by its weak performance last year. Development is the other sector that has suffered a major decline in interest compared to the previous year. 

More defensive strategies across markets and sectors

The search for lower risk is also reflected in investors’ geographic and sectoral preferences. Top picks for European investors are Germany (50%), Netherlands (44%), France and the UK (both 39%). 

Office, residential and industrial/logistics remain the preferred sectors for all investors targeting Europe, however below their seven-year averages. At nearly 70%, offices took the top spot which, though possibly counter-intuitive, can be partially explained by non-European – and Asian Pacific investors in particular – identifying it as the sector of choice when accessing Europe. Residential maintains its second-place position, confirming the structural shift toward this growing institutional market which offers a high and stable income return and a strong countercyclical strategy. At 46%, industrial/logistics – last year’s top preference – slipped to third place. This may be no surprise as the sector is starting to see the reversal of many years of consistent outperformance, sharp yield compression and relatively high rental growth expectations. However, given the sector is underpinned by e-commerce as a megatrend, this may well be a short-term blip.

For European investors, sector preferences line up slightly differently with industrial/logistics and residential in joint first place both at 67%, followed by offices (50%).

Complex mix of issues impacting investment decisions in 2023

There is broad consensus from investors across all regions that inflation, interest rate policy and geopolitical risk are impacting investment decision-making the most.

However, there are strong differences of opinion when it comes to assessing the importance of ESG factors. Over 90% of European investors say that a fund’s commitment to net zero carbon is a key consideration in real estate investment decisions, compared to nearly 70% of their peers in Asia Pacific and 0% of those in North America

(source: INREV)