INREV Index shows conditions hardening in European non-listed

Results from the recent INREV Quarterly Asset Level Index reveal the negative impact of COVID-19 on the European real estate industry, with total returns tipping into negative territory for the first time – down from 0.50% in Q1 to -0.33% in Q2.

This represents the lowest performance tracked by the index since its inception in Q1 2014, demonstrating the downward pressure from the COVID- 19 pandemic on the industry. 

This weak performance was driven by negative capital growth, which accelerated from a -0.45% decline in Q1 to a fall of -1.21% in Q2 2020. Income return also slid to 0.89%, down from 0.95% in Q1.

The INREV Quarterly Fund Index reflected a similar performance, with total returns turning negative for the first time since Q4 2012, sliding from 0.05% in Q1 2020 to -0.60% in Q2 2020.

Among the various sectors, residential was the best performing sector, despite a drop in fund returns from 2.79% in Q1 to 1.19% in Q2, according to the INREV Quarterly Fund Index. Retail, on the other hand, continued to slide with a fifth consecutive quarter of negative performance hitting its lowest trough since Q2 2009, with returns of -3.99% in the last quarter. The office sector moderated at 0.38% and industrial / logistics slowed to 0.62%.

Liquidity due to unpaid rents still continues to remain a problem. According to INREV’s Valuations Questionnaire, rent collection remained a challenge for both open and closed end funds during Q2. Some 21.5% of respondents indicated that they’d received less than half of their rent on time, an increase from 14.1% in Q1 2020. 

Similarly, a declining number of respondents – 66.0% in Q2 versus 78.1% in Q1 – said they’d received between 75% and 100% of rent due for the period.

More respondents expect an impact on net operating income in the future – 78.1% in Q2 2020 compared with 66.7% the previous quarter – be it an increase in rent frees, rent reduction, rent deferrals, or ‘other’.

The questionnaire also revealed an impact on the liquidity of open-end funds, with 24% of respondents indicating that their fund had suspended unit subscriptions, redemptions or the issuance of a dealing NAV, up from 8.5% of respondents in June 2020. Of the suspended funds, 82.6% indicated that this was decided by an internal committee or board and only 17.4% had to close to redemptions due to a regulatory requirement.

INREV’s second COVID-19 Sentiment Survey revealed how investors and managers are adjusting to the new reality, with 75% of respondents indicating a willingness to provide a degree of rent relief or abatement to their tenants. Similarly, only 33% said they were planning to revise their investment plans in light of the pandemic, as opposed to 55% when the first survey was conducted in May.

Lonneke Löwik, INREV’s CEO, said: “The Q2 results reveal the extent of the negative impacts of COVID-19 on the European non-listed real estate market. The effect on returns and other aspects of performance were broadly anticipated, however between January and August 2020 the volume of deals in excess of €250 million rose year-on-year. 

“What’s particularly heartening is the collective sense of purpose in addressing the challenges. There is clear evidence of the ‘we’re in this together’ sentiment of investors / fund managers and their respective tenants.”