European core property markets could experience a growth-driven recovery. Despite ongoing geopolitical tensions in the Middle East, elevated energy prices and resurgent inflation risks, which have resulted in an interest rate-induced extended stabilisation period for capital values, new growth impulses are emerging. A decisive factor here is Europe's endeavour for increased self-reliance, which opens up significant opportunities for property investors.
Justin Curlow, Global Head of Research & Strategy at BNPP AM Alts, highlights that Europe's increased investment in defence and energy infrastructures to strengthen sovereignty will generate substantial additional space requirements in property markets. Concurrently, fundamental data across all major European property sectors proves robust. Vacancy rates remain low, particularly for exceptionally located, high-quality fitted-out and certified spaces, as user demand in these segments is markedly increasing.
Current Market Dynamics
BNPP AM Alts' current analysis identifies several key points shaping the development of European property markets. Capital values for European properties have stabilised and are already showing renewed increases in the most successful sectors. These increases stem from rising net operating incomes and market rents, not from yield compression. Curlow predicts that the upcoming recovery phase will primarily be income-driven.
Continental Europe continues to exhibit an advantageous relative valuation. Prime properties across sectors offer transaction yields of approximately 5%, representing a significant premium over long-term government bonds. Yield premiums in the logistics and retail segments are particularly attractive in an international comparison, as the European market has corrected faster than the US market.
The recovery dynamic now extends beyond just residential and logistics segments. User markets for retail, offices, and hotels have also significantly improved. In some Southern European markets, the supply of high-quality shopping centres is already scarce due to strong tenant demand. However, the disparity between modern, highly sought-after properties and older stock is widening. Curlow emphasises that quality, location, and sustainability characteristics are crucial for valuation and performance. Selective capital allocation and active asset management will be key drivers for portfolio development in the coming recovery phase.
Strategic Implications
- —Continued importance of quality and sustainability in investment decisions.
- —Potential space requirements due to infrastructure investments in defence and energy.
- —Income-driven growth as the primary factor for capital value increases.
- —Attractive relative valuation of European properties in an international context.
