Returns soar for European non-listed real estate in Q2

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Results from the latest pan-European INREV Quarterly Asset Level Index reveal the strong performance of European non-listed real estate. Total returns hit 3.01 per cent in Q2 2021, driven largely by capital growth of 2.10 per cent (up from 0.42 per cent the previous quarter) and marking the fourth consecutive quarter of positive performance, and the best quarterly result in three and a half years. 

At a fund level, total return increased to 2.57 per cent compared with 1.19 per cent in Q1 2021 according to the INREV Quarterly Fund Index. Capital growth spurred performance reaching 1.82 per cent – the highest level since Q4 2006. Core funds delivered a total return of 2.62 per cent in Q2 2021 and continued to outperform value added strategies, which nonetheless rose to 1.75 per cent over the same period.

The INREV Quarterly Asset Level Index recorded a strong, broad-based recovery across Europe, with all major markets reporting Q2 performance in excess of 2.00 per cent. The UK delivered a total return of 3.70 per cent – underpinned by robust capital growth of 2.66 per cent – representing its strongest quarterly performance since Q2 2015. The UK index benefited from significant exposure to the industrial/logistics sector (36 per cent of the index value), which returned 7.36 per cent in Q2 2021. 

Germany maintained a stable performance in Q2 2021, posting a total return of 2.04 per cent – despite a slight fall from the 2.19 per cent in Q1. This marginal slowdown was also reflected in the INREV Quarterly Fund Index, which showed total return for Germany focused funds at its weakest level since Q1 2020. 

The Netherlands saw a sharp recovery from its weak performance in Q1 2021. Total return increased to 3.50 per cent from 0.01 per cent the previous quarter when a substantial hike in transfer tax was levied on Dutch real estate and residential assets in particular.

The industrial/logistics sector posted its strongest result in over 15 years, with an asset level pan-European total quarterly return of 6.23 per cent in Q2 2021, and a 12-month rolling average return of 20.93 per cent. Residential became the second-best performing sector with asset level total returns improving to 3.46 per cent in Q2. However, offices dropped back to third place (despite an increase in asset level total return from 1.07 per cent in Q1 to 1.65 per cent in Q2). This could reflect anticipated uncertainties within the sector  around the long-term impact of Covid-19 on future working habits and office occupancy.

Performance of the retail sector returned to positive territory after seven consecutive quarters of negative results, with an asset level total return of 0.90 per cent in Q2 2021. However, capital growth remained negative at -0.18 per cent. Certain retail sub-sectors, such as supermarkets, retail warehouses and retail parks, delivered strong total returns, whilst high street shops and shopping centres lagged behind.  

The sectoral performance and investment sentiment looks to be in line with developments in the direct real estate investment market since the start of the pandemic in early 2020. Since then, the share of investment in both the industrial/logistics and residential sectors showed a strong upward trend, according to Real Capital Analytics.

In the most recent INREV Quarterly Sentiment Survey conducted in September 2021, 94 per cent of respondents reported being confident to increase their weighting to non-listed real estate. Similarly, respondents reported being able to achieve high levels of rent received versus rent expected at close to 100 per cent for most sectors, including retail for the first time since the Covid-19 outbreak. 

However, there was a slight quarter-on-quarter drop for offices and residential to circa 90 per cent. Furthermore, according to the INREV Valuations Questionnaire, there were no fund suspensions last quarter, and only 15 per cent of the 170 funds in the sample had applied the ‘material uncertainty’ clause to valuations of their funds, compared with 45 per cent in Q2 2020.

Iryna Pylypchuk, INREV’s Director of Research and Market Information, says: "As we have seen in recent previous market updates, confidence in European non-listed real estate has been improving over the last few quarters. But in Q2 2021 total returns have more than doubled, which serves as a strong, positive indicator of a steady, stable recovery from the impact of Covid-19 across much of Europe. That said, when diving deeper, the data also reveal an uneven picture of success, with clear evidence of performance dispersion across all geographies and sectors, and this is particularly visible when looking at the distribution of performance across funds and assets."

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