Credit: GRI Club Exclusive Insights from Europe GRI 2023
DISCOVER THE KEY TAKEAWAYS FROM THE BIGGEST REAL ESTATE EVENT IN EUROPE
Written by Rory Hickman
Taken from our full report, this article provides a brief summary of the more than 45 investor-led roundtable discussions on real estate held during Europe GRI 2023, the biggest event so far in GRI Club’s 25 years of operation, late last year in Paris.
With the support of lead sponsors Greenman and JLL Capital Markets, GRI Club gathered more than 700 of the industry’s leading dealmakers to peer test pricing and benchmark real estate strategies including the investment cycle, hedging in the looming recession, rental growth for commercial real estate, life sciences and data centre resilience, ESG, fundraising, BTR, debt and volatility, logistics, and the future of the market as a whole.
GRI Women’s Committee
(Image: GRI Club)
The GRI Women Leading Real Estate Committee's Club Meeting, co-sponsored by Goldman Sachs and Schroders, took place before the main event, offering female executives a comfortable and fun environment for networking and discussing market trends.
The prevailing sentiment emphasised caution, patience, and thorough due diligence amid low transaction volumes and rising interest rates. The new reality in real estate underscores the importance of income return over cash return, emphasising vertical integration and operational focus.
Pushing real estate forward and empowerment through a gender diverse industry were also central topics, with the GRI Women Leading Real Estate Committee aiming to inspire dealflow opportunities and inspire women in real estate to pursue leadership positions and shape the future of the industry.
The meeting marked the launch of the GRI Women 50/50 Initiative, which will see GRI Club extend a 50% reduction in new membership fees to senior women within the real estate realm who choose to join GRI Club.
Chairmen’s Reunion - Does Capital into Europe still stack up?
China's economic slowdown was another focal point as the country’s two biggest real estate developers face bankruptcy and defaults, with the potential for significant repercussions on the world’s economy.
Discussions considering strategy emphasised caution and agility. Residential and hospitality continue to be seen as safer investments, while offices face underutilization and will require substantial levels of adaptability to meet evolving market trends.
Read GRI Club’s full report detailing the key takeaways from the discussions here: Geopolitical Fragmentation Stresses Real Estate Market
The meeting was part of the GRI Chairman’s Retreat calendar, warming up to the GRI Global Chairmen’s Retreat 2024, a platform for the top tier real estate leaders to share insights and build connections.
Investors’ Talkshow
Europe GRI 2023 started in earnest with the Investors’ Talkshow, featuring GRI Club’s CEO & Managing Partner Gustavo Favaron along with Cherine Aboulzelof (BentallGreenOak), Laurent Lavergne (AXA IM - Real Assets), and Mary Ricks (Kennedy Wilson).
Amidst the economic climate’s current volatility, a call for patience is heard. Challenges include the demand for ESG credentials in office spaces, with the USA facing greater difficulties than Europe, especially in assets with varying cap rates.
Policy crises, financial repression, and concerns about refinancing and recession were also highlighted, while emphasis was placed on adapting to market conditions and the increasing attractiveness of debt financing.
Economy & Finance
The European real estate landscape faces intricate challenges in property valuations amidst market volatility, emphasising diverse valuation methodologies and the need for a market correction.
Changes in the investment landscape are ushering in a return of Alpha opportunities, signifying excess returns for active stock pickers focused on company fundamentals. Factors driving this shift include increased volatility, normalising stock dispersion, the growing influence of stock-specific variables, widening market breadth, and the impact of AI.
The global economy shows signs of a looming recession, with the IMF warning that Germany’s ongoing economic woes are predicted to worsen and advising that the UK will need to keep interest rates high into 2024. The UK has seen the deepest and quickest falls in property valuations, with other major markets lagging behind but still facing potential value drops.
Credit & Debt
As end investors seek ways to safely deploy capital, credit is fast becoming the preferred avenue for value creation. Debt funding is playing an increasingly pivotal role in pricing and risk mitigation, while the emergence of alternative lenders is challenging traditional banking more than ever.
The ongoing dynamics between debt and equity, where to get the best debt exposure in real estate, questions about mezzanine payouts, and challenges in refinancing were also key issues raised.
NPLs in Europe also demand attention, with regulatory shifts wielding influence and interest rate fluctuations looming large as market players contemplate various scenarios. Adaptability and strategic acumen remain essential for industry stakeholders facing an environment rife with uncertainty.
Residential
Institutional appetite for affordable housing is growing with strong potential for profitable, long-term investments with government incentives, but the class presents complexities related to investment yields, regulatory frameworks, ESG considerations, and economic crises. The BTR market has navigated disruptions from the pandemic, geopolitical conflicts, and inflation, yet it remains resilient due to strong demand driven by demographics and income levels.
When it comes to finding opportunity, the UK housing market faces significant price increases but struggles with low yields and construction challenges. In Germany, smaller transactions are prevalent, and student housing landlords are strategically increasing rents. Madrid's residential properties are outperforming Paris, especially in multifamily and single-family sectors. Italy offers investment opportunities in the residential rental market, with collaboration with local experts recommended.
Where to place the institutional bets? The student housing market varies based on cultural differences among countries, but it remains stable with high occupancy rates. Mixed-use and residential real estate markets thrive, but deal availability limits some investors. The senior living sector sees emerging private options but can experience operational challenges. The importance of ESG factors and collaboration between developers and operators is evident across all sectors, with a need to align with evolving regulations and local nuances.
Commercial
The retail sector shows a surprisingly optimistic outlook despite market value depreciation from COVID, emphasising the need for repositioning and considering location, services, and luxury versus convenience in asset performance. Retail sales in Spain have rebounded post-COVID, but uncertainties persist regarding sustainability amidst market volatility.
Mixed-use projects demonstrate increasing value, albeit facing challenges of mixed contracts and decreased exit value, prompting the need for innovative financing methods and clear pricing strategies. Underutilization of office spaces has urged a reevaluation of lease agreements, highlighting the importance of location, ESG considerations, and flexible management.
Office demand reflects a polarisation with a focus on ESG compliance, requiring adaptation to evolving work patterns, while liquidity challenges and distress risk are noted in the evolving financing landscape. There is an overarching shift towards flexibility, sustainability, and decentralisation, reflecting a broader trend in adapting to changing consumer preferences and work habits.
Logistics
Logistics has transitioned from a niche field to a vital component of real estate strategies, with evolving transaction dynamics shaped by investor perspectives and tenant lease retention rates. Some investors are relying on the resilience of the asset class to buy into the next cycle, and logistics might be the next big value add play.
ESG compliance is becoming increasingly important, impacting both operations and exit strategies, but standards remain largely undefined.
In France, the dynamic logistics market emphasises proximity to consumer centres, technological advancements, and sustainability. In the UK, logistics demand persists, while in Central and Eastern Europe, foreign investors are drawn to Poland, but concerns about political developments affect the market's outlook.
Along with economic and geopolitical challenges - including nearshoring, ongoing global conflicts, high government debt, and inflation - the logistics industry continues to adapt to meet consumer demands.
Hospitality
The hotel industry's outlook is cautiously optimistic, marked by a strong recovery in 2022 and record-high ADRs due to increased demand, but it faces uncertainty as revenge travel diminishes with post-COVID normalisation. Escalating costs, particularly in labour, present difficulties, while evolving guest preferences, especially among Gen Z, offer prospects for experience-driven travel.
Fiscal constraints and ESG concerns further complicate the industry's landscape. The rise of luxury brands requires heightened employee training, and guests demand elevated service quality in line with ESG values. Successful strategies encompass brand selection, Gen Z engagement, ADR management, operational optimization, ESG investment, savvy lease and management agreement choices, exploration of market convergence, and the consideration of branded residences.
Inflation and an impending recession impact transaction volumes and financing, while various operating models and ESG considerations play increasingly vital roles in the industry's future, highlighting hotels' positive community impact.
ESG
The real estate industry is undergoing a significant transformation with sustainability at its core, but it faces challenges in standardising ESG metrics and reconciling ESG with market value. Nevertheless, there is a growing focus on socially and environmentally responsible projects, with increasing investor interest.
The development of the environmental aspect of ESG has outpaced social and governance components, emphasising the importance of understanding and meeting the actual needs of end-users for social value creation.
Data-driven tools, collaboration through "green leases," and the emergence of social taxonomy are becoming crucial in advancing sustainability efforts within the real estate sector, as it transitions towards long-term performance, ESG integration, and regulatory compliance to meet the demand for sustainable projects and resilience in a changing market.
To read more and see more photos from the event you can get the full report HERE.
You can also learn more about GRI Club Europe and all our upcoming events for 2024 HERE.
