TIME score - European Investment Market

Macroeconomy

When will the European Central Bank (ECB) and the Bank of England (BoE) make the first interest rate cut? What are the market expectations for future interest rates?

Our view

• We are ‘nearly there’ on inflation; good progress on inflation is being made, and underlying pressures of inflation are easing.
• Both the ECB and the BoE will remain data-dependent.
• The pricing of swaps indicates a strong likelihood that the ECB will commence rate cuts in June, we believe the ECB will lead and will begin to cut in June, followed by the BoE, expected to cut rates in August.
• Economic growth is expected to continue at a sluggish pace.

CRE Credit, Debt Markets & Outlook

How does liquidity influence investors' access to capital, or impact their investment positions during different market conditions? How will risk impact investors’ expectations of returns? How do various factors like geopolitical events influence markets, and investors’ decision-making process? What needs to occur to enable the debt markets to loosen up? When can we expect investment deal volume to pick up?

Our view

• The commercial real estate sector has faced significant pressure. The balance of risk has shifted; downside risks should start to dissipate.
• In the last 18 months, euro area banks have encountered financial stability risks stemming from their exposure to CRE. Despite varying exposure levels across countries, banks are more resilient to losses thanks to larger capital reserves.
• Stringent lending criteria from both banks and non-bank lenders is expected to continue, although we expect gradual loosening to occur over H2 2024, as stress eases, confidence rebounds, and financial sector conditions improve.
• We are ‘almost there’ - the correction in CRE started mid-2022 and the industry has already seen a major adjustment in asset values. As rate changes have stabilised, values in segments of the market have also stabilised. This revaluation has happened faster compared to previous cycles. Looking ahead, valuations will improve as interest rates start to fall.
• Historically, the best time to buy property is when the ECB and BoE begin to initiate rate cuts (this tends to coincide with a bottoming and inflection in property values).

Our framework for the capital markets recovery is as follows

• Early Recovery Phase: interest rates are stable and expected to decrease soon, allowing for CRE values to stabilise. As the ECB and BoE pivot and start cutting rates (but not going back to zero-bound), the market repricing creates opportunities, offering more appealing entry points for investors, with more fairly priced market.
• Advanced Recovery Phase: This phase is marked by increased investment and rising optimism. As the asset competition increases, we will start seeing improvements in valuations.

Where are we now?

At the turning point

According to the TIME score the commercial real estate market is in a transition phase, and the key factors for the next few months remain issues related to momentum, i.e. liquidity, as the cost of debt remains high.

Despite lingering uncertainty over the past few months, tangible opportunities are now appearing. This shift has become evident since the close of last year and is particularly noticeable in the cyclical element of the TIME score, where pricing has stabilised around the 3 score mark.

Our analysis of the TIME score shows there is a strong correlation with total returns and 12-month rolling total investment volumes. The TIME score leads total returns by two quarters. The TIME score has already identified that the turning point in real estate is here, as conditions improve total returns are poised to increase.

The European logistics sector, well known for having repriced first and fast, is now ahead of the residential, retail and office sector. The logistics sector is making progress towards heading into the transition/early growth period where the direction of growth, activity, and sentiment will improve.

Retail, has been off the radar for a while, but the tide is turning. The retail sector is well-placed to capitalise on the evolving market dynamics. Retail has experienced a significant period of restructuring, so its current performance is based on a substantially redefined starting point.

Both office and retail sectors require liquidity and scale to improve.