The latest sentiment barometer from European non-listed funds organisation INREV reflects the extent to which investors have been rattled by the Russian invasion of Ukraine, ongoing fears about inflation, and more general worries about the direction of the global economy. Germany, in particular, has seen its standing as most favourite investment location slipping precipitously in the ratings.
In the last but one of INREV's regular soundings of investment managers and investors, Germany shared pole position with the UK. In the latest survey - taken at the beginning of March, after the Russian invasion had begun - Germany had fallen to second-last place among the ten European countries or regions surveyed.
In December, one in three investment managers surveyed had said they planned to increase their allocation to Germany, with not a single respondent talking of reducing their German weighting. Only three months later, 15% have announced a reduction in their allocation - with only 8% now wanting to grow their German portfolio. All in all, Germany slips into the red with a "negative net sentiment" of -7% - which the INREV researchers describe as the "most dramatic shift" among all target markets.
However, Germany is not alone; many other countries and regions have also fallen out of favour with investors. At the top - despite losses - is the UK, where 21% want to increase their real estate investments, but none want to reduce their allocation. The Netherlands, France and Spain are also up, with only the Netherlands really making notable gains.
Perhaps unsurprisingly, 29% also anticipate decreasing allocations to Fringe CEE, while for Core CEE overall net sentiment is at -7%.
More than one in three respondents (38%) expect European real estate investments in general to underperform in future. In the previous quarter, as COVID appeared to be receding, only 8% gave such a negative forecast. Nevertheless, only 5% intend to reduce their European real estate investments overall. Four out of five (81%) are so far maintaining their investment plans, and 14% even want to increase their European real estate weighting.
According to Irina Pylypchuck, head of research at INREV, "The ongoing conflict in Ukraine has an indirect negative impact because it clouds the economic outlook and further increases inflationary pressure. These are probably the reasons for the gloomy mood. Our latest March survey already gives a first impression of this.
"The greater the geopolitical uncertainty, the worse the business climate and the lower the expectations for asset performance - this also applies to non-listed real estate investments, which actually weather periods of geopolitical tension relatively well. The boost in capital values we saw in the last three quarters of 2021 is likely to fizzle out in the first half of 2022."
Last year, and in particular in the last quarter of 2021, European non-listed real estate delivered a record-breaking performance, with the INREV pan-European Quarterly Asset Level Index in Q4 posting a record high total return of 4.85%, driven by exceptional capital growth of 3.99%, which accounts for over 80% of the total performance. This represents a one-year rolling total return of 12.89% – well above the annualised three-year rolling total return of 8.02%.
Similarly, the INREV Quarterly Fund Index delivered total return of 4.27%, compared with 2.93% in the third quarter of 2021. Again, capital growth pushed up overall performance hitting a high of 3.18% (74% of the total) – the strongest result at the fund level since 2006.
