Real Estate Reset: Rethinking Risk and Recovery

Christophe Murciani, Head of Real Estate Debt at LBP AM – European Private Markets, explores how the real estate sector is resetting its approach to risk and recovery.

In this video, discover how investors are rethinking asset strategies, diversifying income streams, and navigating financing conditions to prepare for a potential rebound in a transformed market landscape.

​​​​​​​Since the start of hostilities in Ukraine, the ensuing sharp correction in the bond market, and the tightening of monetary policies to curb inflation, real estate has suffered heavy losses. The investment market in Europe has declined by nearly two-thirds in volume. After three years of turbulence, what is the market situation and what are the prospects?

​​​​​​​First, investors have made a profound change in their real estate allocation by modifying the NATURE of the risks they are willing to take. Today, they are mainly interested in so-called operational assets: hotels, managed residential properties, and even the acquisition of operational platforms on more traditional assets such as logistics or offices. They believe that future value creation will come more from the creation of a business attached to the assets than from the revaluation of the buildings.

These operational risks are replacing the traditional “3Ds”:

• Deterioration: without regular maintenance, the building falls into disrepair and is taken off the market
  
• Default: the tenant may default or leave the building when they have the option to do so under the lease, resulting in an immediate loss of rent
  
• Drift: expected rates of return rise, which lowers the value of the building when it is resold.

In reality, it is as if we were realizing that owning a building is not only a financial investment but also a physical asset that must be maintained and marketed regularly.

Diversifying Income Streams: The Rise of Hybrid Assets

Secondly, investors are looking to diversify their rental income. They are therefore interested in:

• Managed residential properties with individual tenants: student accommodation, serviced apartments, co-living,
• Hotels, with a balance of income between business and leisure customers, and between domestic and international customers
  
• Mixed-use properties, particularly office buildings, offering leisure facilities (fitness rooms), restaurants (with or without rooftop terraces) open to the public, and local shops
  ​​​​​​​
  

Financing and Outlook: Is the Market Ready to Rebound?

​​​​​​​Finally, in terms of financing, after a period of tightening credit conditions, lenders have entered an accommodative cycle. This relative easing is partly due to the scarcity of so-called “core” real estate transactions and partly to pressure from a few alternative lenders who have raised significant funds.

How might the market evolve over the coming semesters?

Today, the yield curve has normalized, which should be a strong signal to buy for the recovery of investment volumes. However, the absolute level of risk-free rates is stabilizing at a high level and varies greatly between Eurozone countries. With the 10-year OAT in France hovering around 3.50%, many investors remain dissatisfied with the price at which they could sell their properties.

It is difficult to predict which of these two factors will lead to a thaw (normalization of the yield curve or high risk-free yields), but market players have accumulated a lot of liquidity in anticipation of a significant recovery when it does occur.