Predictions for Europe's real estate market by 2023: 7 predictions

The European real estate market is under pressure due to stagflation and weak investor confidence. According to BNP Paribas REIM's H2 2023 European Real Estate Market Forecast - Beacon report, Europe's real estate markets are still reacting to the new environment created by higher financing costs and price adjustments starting at the end of 2022. Here are seven predictions for the end of 2023.

According to BNP Paribas REIM

the current level of pending transactions does not portend a recovery in market activity in the short term, and the price discovery phase may continue until 2023. Moreover, the rise in yields could continue until the end of 2023, when central banks are expected to stop tightening their monetary policies. Investors should pay attention to several factors in this balancing phase.

Closer attention should be paid to

• liquid markets and understand which sectors to focus on to optimize risk and return.
• Estimating the long-term fair value of assets as the market is likely to remain fairly cyclical.
• Pay attention to sustainable investments, as real estate projects must incorporate sustainability practices to be more attractive and profitable in the long run.
• Show attention to asset obsolescence, not only in terms of real estate changes, but also in terms of location, functionality and economics.
• Don't neglect assets that require minor improvements, as renovations can prevent functional or economic obsolescence.

European real estate, the best asset in 2023

On the other hand, investors should also focus on portfolio diversification to reduce portfolio volatility. In this respect, residential and healthcare assets represent good opportunities within this strategy, as they have proven their resilience during the current upturn and should be among the best performers over the next five years.

In particular, the healthcare market benefits from a good long-term demand outlook driven by macro trends that will not be affected by the current economic slowdown, such as an aging population or an increase in chronic diseases.

Moreover, logistics and hospitality present a high risk/high reward scenario for investors. The increase in discretionary spending on experiential activities should be beneficial for the hospitality sector, especially for health and wellness-oriented hospitality, such as yoga, meditation, or spa resorts, as well as for nature-related tourism, including camping.

Forecasts for the European market in 2023

On the other hand, according to the report, the new economic environment that began at the end of 2022 is expected to last into 2023 with high inflation and interest rates. This will make it difficult for the European real estate market to recover, as it affects financing conditions and investor sentiment.

Laurent Ternisien, Chief Client Officer at BNP Paribas REIM, stated that investors "are adopting new strategies to adapt and diversify their portfolios." They should focus on more liquid markets and sustainable assets "as well as on types of real estate that are defined by macro trends and are not affected by the current environment," such as "aging population, urbanization, and the growth of family formations."

Taking this into account, the main forecasts for the real estate market in 2023 are as follows:

• The terms of financing will determine the recovery. High inflation and the crisis in the US banking sector have not weakened Europe's economic outlook, but lenders and borrowers remain very risk-oriented. As a result, debt flows may continue to decline and put pressure on investment activity in Europe until 2023.
• The European real estate sector has yet to assess the short-term risks. Yields are rising rapidly to cope with higher borrowing costs. In this regard, the United Kingdom is the most advanced in this phase of revaluation, followed by the rest of Europe. The timing and peak of central bank interest rates remain unclear, and the risk of large-scale refinancing and repayment could exacerbate and prolong the pricing phase for prime assets.
• Reassessing core investments to avoid abandoned assets and secondary markets. Secondary assets can experience price declines for many years across all types of real estate. Small but significant market segments may turn out to be unpromising and cease to be core. At the same time, investors focused on substantial value growth and value-add opportunities can identify numerous assets in established markets worth investing in for their enhancement and sustainability.
• An increase in the yield of premium office spaces is expected.