The presentation of the MSCI Index of 2023 across several countries confirmed the European decline in the capital markets, with the investment volume in Europe dropping to 2012 levels - approximately 170 billion euros.
Although the slowdown in dealmaking mirrors the pace set in the Global Financial Crisis of 2008, this time optimism prevails, and the assets valuation suffered a quicker correction. The reflation period is expected to be inverted still during the first half of 2024.
According to Luís Francisco, Vice President at MSCI, who presented the Spanish Index results at Madrid in the CMS law firm auditorium, in order to return to “normality” we need to overcome the current mismatch between buyers and sellers, who have different expectations and do not agree on the price point. MSCI identified an important increase in possible distress assets coming into the market, but until now no relevant transactions have been completed.
Facing last year uncertainty, institutional investors have reduced their average deal volume in more than 50%, especially visible in the case of German, US, and UK institutional capital. On the other hand, there was room for new players to assume leading buying positions, and the TOP 10 ranking of 2023 brought some surprises, even though Blackstone continued to be the number 1 buyer surpassing the 3-billion-euro mark of investment.
Already showing signs of recovery, the listed real estate sector is outperforming the private market, setting a positive momentum and some renewed faith for the real estate sector.
Spanish real estate delivered a total return of 0.0%
In 2023, income property monitored by MSCI (a total of 773 assets, encompassed in 73 portfolios with a total value of 21 billion euros) generated a total return of 0.0%. Excluding the effect of investments made throughout the year from an active management perspective, the total return of the so-called "standing investments" - i.e. those assets that have been in the portfolios since the start of the year and which have not been sold - was -0.8%, of which a positive 4.7% was generated by the rental component, while the contribution from capital growth had a negative impact of -5.3%.
The main conclusions highlighted by Luís Francisco were that despite a slight negative performance, Spain is among top performing markets in 2023, and on a real estate sector ‘like-for-like’ analysis the country has also performed above average. Hotels was the top performing sector in 2023 (10.6% return), followed by retail (2.5% return).
After the presentation of the Spanish results, António Gil Machado, Partner at Grupo Iberinmo, moderated a roundtable discussion in which Alfonso Brunet, CEO of Castellana Properties, Carlos Becerril, Head of Asset Management at Generali Real Estate, Diego Laguia, Investment & Asset Manager at M&G Real Estate, and Antoni Sastre Cuadri, Head of Transaction and Valuation at Zurich, shared their conclusions on last year performance, together with some forecast for the future.
For Alfonso Brunet, there was no surprise in the good performance of the retail sector, and the “I told you so” expression was in order. For many times seen as the ugly duck, retail is now moving to a white swan profile, supported by the fact that average occupational levels are above 95%, footfall figures and sales are also increasing, and the retailers and operators have very “comfortable” effort rates. Furthermore, investors were also able to increase the rents so 2023 was truly a win-win year. The CEO of Castellana Properties believes that 2024 will be even better, with the first quarter already showing impressive figures while leading the investment transactions volume in Spain.
One of the reasons for the relatively good performance of Spain compared to its European peers is explained by its launching point. Carlos Becerril, explained that the southern countries historically had higher interest rates than the more mature markets, contributing to a smaller shock in the latest uprise. Besides that, transactions in Spain are being done with low leverage, and the internal consumption has played a vital role in balancing the economy.
“History may not repeat itself, but it certainly rhymes” – Diego Laguia, M&G Real Estate
Real estate is one of those sectors which follows cycles, and anticipating the shift means obtaining good results. Despite the general picture of a not so favourable cycle, Diego Laguia first comment on the results highlighted the fact that Spain went through its best Hotel investment year. And even with a 0.0% overall return, the being above the European average provides some comfort.
M&G also reconfirmed its full trust in the Living segment, and since the current effort rate to buy a house in Spain is at 40%, Diego Laguia anticipates that fundamentals will remain strong for a long period of time. He also recalled that even through uncertainty the firm was always believer in the sector in Europe, like proves the firm early bet in BTR in the UK.
Expecting a more severe capital growth impact, Antoni Sastre evidenced that for every 100 base points the office assets suffered a 20% correction on its valuation, and in his opinion, we still haven’t corrected the valuations entirely. Truth to be told, offices were probably the asset class where interest rates had the highest impact, to which sum up both the difficulty in access financing and the increasing requirements of tenants to improve the quality of these spaces (offices moving to a hospitality concept, with increased need of Capex).
In the same line, Carlos Becerril agreed that the fly to quality is undeniable and in the Insurance Companies strategies a purchase decision only moves forward if the asset fulfills three standard factors: location, quality, and ESG compliance.
Within a challenging crystal ball moment, the experts have launched their predictions for the 2024 results of the Spanish MSCI Property Index, which we share exclusively with our readers in the following SPECIAL STORY.