Eurozone inflation measures are on path to allow real income growth

Eurozone inflation measures are on path to allow real income growth
Luigi Speranza, Global Head Markets 360º and Chief Economist at BNP Paribas

More than three hundred managers and professionals attended the sixth edition of the Iberian REIT & Listed Conference, which has already established itself as one of the most important meetings for the real estate sector in Spain and Portugal. Once again, Iberian Property joined forces with EPRA to organise this conference, which took place the 6th of February in the distinguished Rosewood Villa Magna hotel in Madrid, counting with the support of Aedas Homes, BNP Paribas Real Estate, Clifford Chance, Colonial, Lar España, Merlin Properties, and Morais Leitão.

In a keynote presentation, Luigi Speranza, Global Head Markets 360º and Chief Economist at BNP Paribas, confessed that if 2 years ago we would have been told China would enter an economic slowdown period, and that we would have 2 armed conflicts in Europe and the Middle East, most likely we would have agreed that today we would be in a recession…but it is not the case. So why not?

Luigi Speranza explained that the supportive fiscal policy and the good savings rate contributed for the economic stability, and surprisingly the labour market remained tight compared to past standards.

On a relaxed note, the Chief economist stated that his outlook aligns with his surname (Speranza meaning hope in English). Eurozone inflation measures are on path to allow wage growth and therefore to fill in the gap created in the last two years, so this means real income growth as well, which ultimately is good news for consumption.

Inflationary pressures can still subside even with elevated wage growth, as corporate profit margins are squeezed

Optimism seems to prevail, nevertheless Luigi Speranza alerted the audience for some possible risks. First, shipping cost indexes relation to geopolitical tensions might pose a risk of supply-driven inflation re-igniting. Secondly, labour has been pointed out in the Eurozone as a key factor limiting production.

«Looking ahead, we think Spain still benefits from at least two relative advantages compared to core economies: 1- continued disbursement of NGEU funds; 2- and a higher reliance on services exports which have so far relatively unaffected by the weak manufacturing cycle and monetary policy tightening», he concluded.

Borja Ortega, CEO of BNP Paribas Real Estate Spain, was in charge of moderating the first roundtable discussion of the conference, which included Miguel Pereda, vice-chairman of Lar España and chairman of Grupo Lar; Ismael Clemente, CEO of MERLIN Properties; Pere Viñolas, CEO of Colonial; and David Martínez, CEO of AEDAS Homes.

Real estate in 2023: “playing the waiting game”

On the consultant's view, 2023 was a challenging year, in which we saw the most aggressive interest rate hikes of the whole historical series, rising by 400 basis points over 12 months. This practically drove institutional investors out of the game, given the impact for them of rising interest rates, and they await a price adjustment and stable macroeconomic prospects which have not yet come to fruition.

Despite the market adjustment in investment volumes (-40.5%), in asset valuations and increased returns, the market did offer opportunities for investors who were able to seize the moment to increase their exposure to real estate, such as family offices, which undertook some of the most notable operations in 2023.

Another positive point in 2023, which to a great extent counteracted the price adjustment from the seller side, was the good performance being seen in market fundamentals across most sectors.

The message from BNP Paribas Real Estate Spain was clear: "Stabilisation of interest rates and inflation pose a scenario of simpler decision-making in 2024"

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