Non-listed real estate registers healthy performance in Q1, says INREV

Results from the latest INREV Pan-European Quarterly Asset Level Index reveal healthy performance by European non-listed real estate, with total returns reaching 1.35 per cent in Q1 2021.

Although slightly lower than the 1.96 per cent total returns posted in Q4 2020, the latest figures reflect the third consecutive quarter of positive performance. Capital growth reached 0.42 per cent in Q1 2021, compared to 1.06 per cent in Q4 2020. These results indicate a return to sustainable growth and a continuing trend of investor confidence that was first reported in Q3 2020, following an initial period of market turbulence prompted by the Covid-19 pandemic.

On a fund level, the Q1 2021 total return reached 1.24 per cent, with capital growth increasing to 0.77 per cent, the highest quarterly level in almost two years, according to the INREV Quarterly Fund Index.

Core funds continued to outperform value added strategies, delivering an average total return of 1.28 per cent in Q1 – slightly lower than the 1.65 per cent achieved in the previous quarter. However, for the first time since the end of 2019 average total return for value-added strategies tipped into positive territory rising to 0.56 per cent in Q1 2021 up from -0.15 per cent in Q4 2020 and narrowing the performance gap with core strategies.

The first quarter of 2021 saw a broad-based recovery in performance across most of Europe. Following the uncertainty of Brexit and the initial impacts of Covid-19, the UK saw positive performance, delivering a total return of 1.73 per cent at an asset level. This was underpinned by an increase in capital growth to 0.67 per cent for the same period.

Germany maintained a strong, stable performance with a total return of 2.32 per cent and the highest capital growth amongst all European countries at 1.45 per cent. Similarly, France delivered a healthy total return of 1.40 per cent, according to the INREV Quarterly Asset Level Index.

The Netherlands was a notable exception to the overall positive picture in Europe. A sharp increase in Dutch transfer taxes on residential investments hindered the overall performance of the INREV Netherlands Quarterly Asset Level Index due to the substantial size of the residential sector. Capital growth turned negative to -0.77 per cent, and the Q1 total return slid to 0.10 per cent.

The Nordics topped the geographic total return performance rankings with 2.34 per cent in Q1 2020. This figure was significantly boosted by numbers from Sweden where asset-level total return hit 3.35 per cent and which accounted for 52 per cent of the Nordics sub-index.

According to the INREV Pan-European Quarterly Asset Level Index, industrial/logistics retained its position as the strongest performing sector with a total return of 4.50 per cent in the first quarter of 2021. It reflects investors’ seemingly insatiable appetite for the sector, which looks set to continue.

Offices became the second-best performing sector in Q1, with an asset level total return of 1.07 per cent. This might mirror increased investor confidence in a return to offices, as part of a widely anticipated new hybrid working model.

The consequences of COVID-19 continued to plague the retail sector, which delivered a total return of -0.60 per cent, marking the seventh consecutive quarter of negative performance at an asset level. However, capital growth stood at -1.63 per cent, which is the best result for retail since the end of 2019 and an indication that the sector’s downward trajectory could be levelling out.

Total return for residential in Q1 2020 dropped to 0.11 per cent – down from 1.89 per cent in the previous quarter, heavily influenced by the developments in the Dutch residential market.

According to the INREV Sentiment Survey, conducted in June 2021, 64 per cent of respondents (the highest percentage since May 2020) indicated that their assessment of investment risk had not changed compared to the previous reporting period of March 2021; and rent received versus rent expected was close to 100 per cent in most cases.

Similarly, all survey respondents said they were equally or more confident about upweighting their investments in European real estate compared with a year ago – 17 per cent of investors plan to increase allocations to the sector, while 83 per cent plan to invest the same. None plan to reduce allocations.

Iryna Pylypchuk, INREV’s Director of Research and Market Information, says: “These results point very much toward the green shoots of recovery and a continued growth in confidence among European non-listed real estate market participants. That said, as the vaccination roll-out continues across Europe and we put the worst of the Covid-19 pandemic behind us, the dispersion in performance at a sector, sub-sector and geographic level is expected to stay and even accelerate in some cases.”