The investment market in Belgium

March 21, 2023

The Belgian investment market, from resilience to new paradigms

The Belgian office investment market in 2022 experienced record volumes, despite the turbulent market conditions. The successive European Central Bank interest rate hikes pushed yields upward, which diverted some institutional investors from the European and Belgian real estate markets. In this uncertain context, a new paradigm may emerge for the Belgian investment market.

1. A recap of the office investment market in 2022

The Belgian office market concluded the year 2022 with a total investment volume of approximately EUR 3.5 billion, making it the second-best year on record, despite the challenging market conditions. The majority of the investment, approximately EUR 3 billion, was recorded in Brussels, largely due to remarkable transactions, some of which were initiated in 2021. The largest transactions included the North Galaxy, North Light/Pole Star, Conscience, and Egmont, which totalled EUR 1.6 billion on their own. The largest deal in the regional markets was the purchase of Zuiderpoort by Blue Colibri in Ghent.

Top 5 Office investment transactions in Belgium in 2022 

The rise in interest rates and tightened financing conditions have taken a toll on the investment market, particularly in the latter half of the year. As a result, yields have been revised upward, forward sales transactions have ceased, and numerous institutional investors have deferred their real estate plans. These trends are expected to continue shaping the market throughout the year 2023.

2. A new player in town, the “denominator effect”

Diversification is a fundamental principle in finance and is used by large financial institutions to maximize returns while also minimizing risk. To diversify an investment portfolio, institutions combine investments that are not directly correlated with each other by investing across various financial instruments, markets, asset classes, and across the risk spectrum. This approach enables them to attain desired returns with a lower overall risk compared to investing solely in a single asset class.

However, the sharp decline in public markets since the start of 2022 has resulted in the so-called "denominator effect" challenge for many investors and financial institutions. With rising interest rates causing bonds to lose value, combined with the recent underperformance of stock markets, financial institutions find themselves heavily invested in illiquid assets such as real estate and infrastructure. This denominator effect refers to how large shifts in the value of an institution's portfolio can impact the denominator used to calculate the asset's percentage in the portfolio, causing imbalances in their asset allocations.

The disruption of asset allocations because of market fluctuations can have far-reaching impacts on real estate markets. Since real estate is considered an illiquid asset class, the denominator effect could cause institutional investors divesting real estate at inopportune market conditions, presenting opportunities for other investors to acquire real estate at an attractive basis.

The denominator effect can also lead to a decrease in capital inflow into private real estate markets. Pension funds and other institutional investors may opt to limit or temporarily halt their real estate investments in light of asset sales, reducing the amount of capital available for investment in real estate. This, in turn, could result in lower asset pricing and reduce the appeal of exiting investments, thus impacting overall returns for investors seeking to harvest gains at the end of the business plan.

Given that many investors must abide by strict asset allocation ranges set by their investment committees, they are faced with the challenge of (re)balancing their portfolios in the face of market fluctuations.

3. The impact of the denominator effect on the Belgian investment market. 

And that is exactly what we currently observe on the Belgian and especially Brussels office investment market. 

Between July 2022 and February 2023, the European Central Bank increased its interest rates by an unprecedented 250bps in successive rate hikes, reaching the 3% cap for the first time since 2008. As no surprise, the Belgian 10-years bond yield followed the same curve and raised dramatically these last months. 

The tightening of financing conditions as a result of these rate hikes has dampened investors' appetite for real estate, particularly among institutional investors who are heavily invested in this asset class. The effect on yields was also immediate, with prime office yields in the Brussels central business district rising by 50bps to reach 4.10%. Further yield increases are expected in 2023, potentially reaching a 4.50% cap. This has led to a slowdown by traditional institutional investors, with limited interest from German funds and insurance companies. 

Five years after their first wave of acquisitions, Korean investors are now looking to sell. This is evidenced by the recent disposal the Egmont and Engie headquarters. Globally, transactions have decelerated since September 2022.

4. So, what’s next for the office investment market?

However, the impact of the redemption by the denominator effect will not bring the investment market to a standstill. Rather, it will drive its transformation, as new investment opportunities arise and new players enter the market.

Recently, French SCPI (Société Civile de Placement Immobilier) have continued to raise capital with their attractive returns. These SCPI-funds have become almost full-equity buyers, putting them in a better position compared to institutional funds stuck with higher cost of debt. Moreover, they are quick in acquisitions as they need to pay returns to investors within a 4-month period after raising capital.

While these SCPI consider various asset classes (such as the mixed-use Elite House, purchased by Affinités Pierre in 2021), they primarily target (large) office tickets. Additionally, they currently avoid markets like Paris due to their misaligned pricing. With a 2.7% prime yield in mind and financing conditions above 3%, the Paris office market is currently not balanced.

In contrast, the prime yield of 4.10% in Brussels makes it a more attractive option for these funds, as evidenced by their recent acquisitions.

Recent acquisitions by French SCPI in Brussels

It's worth noting that French SCPI-funds has a diverse investment spectrum, and they are not solely focused on long-term cash flows.

5. To Conclude

The Belgian investment market has seen a series of foreign investors coming from different geographical regions such as Sweden, Ireland, Germany, and more recently South-East Asia, particularly South Korea. 

Given the current market trends, it is anticipated that French SCPI-funds might establish a strong presence in the Belgian market. The Belgian market offers more favorable returns and lower volatility, making it an attractive investment destination. As such, these could become the next capital wave observed in Belgium in 2023.

March 15, 2023

Three scenarios for the coming years: Navigating Uncertainty

After a turbulent 2022, the macroeconomic environment for 2023 is clouded in uncertainty. The path and influence of central banks’ monetary tightening remain unknown, and while energy prices have fallen, there are still concerns about energy supply and geopolitical tensions.

Unpredictable macroeconomic outlook

The economic forecasts from organisations such as the International Monetary Fund (IMF), World Bank and Organization for Economic Cooperation and Development (OECD) anticipate moderate growth in the U.S. but surprisingly also limited growth in the eurozone, despite elevated inflation. The mood at the World Economic Forum in Davos was likewise more upbeat, due to three potential tailwinds for the global economy: China’s reopening and the possibility of a “revenge spending” boom, falling energy prices providing relief in Europe and the Inflation Reduction Act’s boost to the U.S. economy. Caution may still be necessary, though, as central banks continue to fight inflation, and geopolitical tensions may continue to surprise in 2023.

Three paths for Belgian growth and inflation

Among this high uncertainty, we outline three macroeconomic scenarios for coming years and their corresponding impact on the Belgian economy:

• Baseline: Belgium experienced a technical recession during the winter, with growth suffering from the effects of the energy crisis combined with a rapid tightening of monetary policy. Only the second half of 2023 does the economy return to robust growth.
• Strong rebound: Current headwinds get resolved and supply-chain issues ease. Inflation is under control and falls more than economists’ consensus expectation, while economic growth surprises on the upside.
• Hard landing: The geopolitical tensions escalate further, causing a sharp deterioration in European economic sentiment. A sustained period of low investment in innovative industries and human capital weighs on productivity growth, eroding the economy’s potential.

Belgian GDP forecasts

Belgian inflation forecasts 

Positioning in a uncertain environment

Such shifts in market dynamics may be considered by some investors as opportunities to explore active allocation decisions targeting explicit exposures over multiple periods. 

Diversification is indeed a fundamental principle in finance and is used by large financial institutions to maximise returns while also minimising risk. To diversify an investment portfolio, institutions combine investments that are not directly correlated with each other by investing across various financial instruments, markets, asset classes, and across the risk spectrum. This approach enables them to attain desired returns with a lower overall risk compared to investing solely in a single asset class.

Conventional market valuation indexes continue to be essential for asset allocation investment products. Non-market-cap indexes, on the other hand, may allow investors to pursue objectives reflecting their views by supporting in the creation of products designed to meet additional objectives such as integrating ESG and climate consideration, or taking exposure to thematic trends.

Due to the ambiguity around economic growth, monetary policy, and the geopolitical situation, we expect interest rates to remain high and volatile markets in the coming months. 

As an example, at the European Central Bank (ECB) raised interest rates by another 50 bps and explicitly signalled at least one more hike of the same magnitude next month, reaffirming it would stay the course in the fight against high inflation.

As a result, investors might prefer tilts to value, quality, high-dividend-yield and minimum-volatility-stocks - which, historically, have been more resilient in such an environment. Despite recent optimism, investors may not want let their guard down.

Potential implications for Belgian CRE

Following the recent changes in the monetary policy of the ECB, commercial real estate has started to adapt to these interest rate hikes. It goes without saying that yields are facing changes. Last year, yields have increased by an average of 50 bps across all markets. Although the rise was rather minor at the time, more ECB interest rate hikes are projected to have an impact on rates this year, with yields rising by another 50 basis points or so, according to the model we created.

Evolution of Brussels office prime yield

Increasing interest rates have driven up property yields, leading prices to fall. Besides the rise in rates, the spread with bond yields remains historically low, indicating that property values may drop further. Cushman & Wakefield has developed a baseline short-term mild recession scenario in the Eurozone for our projection. In this scenario, property values in Europe would decrease by 20% from the start of the rate hikes to now. 

Property Index Value

These yields shifts will obviously impact the investment market in the coming months and years at the European level, leading to some regearing in investment flows. As a result, volumes could potentially decrease in Belgium but a changing market environment could also offer some opportunities. New investors could also enter the Belgian investment market, seeking for better returns compared to other European markets.