Domenico Amicuzi is a dynamic and ambitious real estate manager with extensive experience in the Italian real estate sector, including roles in consulting, managerial positions in major real estate companies, and development for leading brands in retail and large-scale distribution. He is also an Associate Member of the Royal Institution of Chartered Surveyors (RICS). We asked him for his insights on the European real estate market in 2024 and his prospects and forecasts for the sector
How do you see the European real estate market in 2024?
The European real estate market is facing a challenging scenario, marked by the impact of the Covid-19 pandemic, the rise of inflation and interest rates, the tightening of credit conditions and the uncertainty of the economic outlook. These factors are affecting the performance and the valuation of commercial real estate (CRE) assets, especially in the office, retail and hospitality sectors, which have suffered the most from the lockdowns, the social distancing measures and the changes in consumer behaviour. On the other hand, some segments of the market are showing resilience and growth potential, such as the living sectors (residential, student, senior and affordable housing), the logistics and industrial sector, which benefit from the e-commerce boom and the supply chain reconfiguration, and the alternative sectors, such as data centres, healthcare, education and leisure, which offer diversification and long-term income streams.
What are the main trends and drivers that will shape the European real estate market in 2024?
I think that the main trends and drivers that will shape the European real estate market in 2024 are the following:
· The sustainability and ESG (Environmental, Social and Governance) agenda, which is becoming increasingly important for investors, occupiers, regulators and society at large. The real estate sector has a significant role and responsibility in addressing the climate change challenge, reducing the carbon footprint and improving the energy efficiency of buildings, as well as enhancing the social and governance aspects of real estate operations and investments. The European Union has set ambitious targets and regulations to achieve the green transition, such as the “European Green Deal”, the “EU Taxonomy” and the “SFDR – Sustainable Finance Disclosure Regulation”, which will have a significant impact on the real estate sector. Investors and occupiers will favour green and certified buildings, which offer higher returns, lower risks and better reputation. The demand for green financing and green bonds will also increase, as well as the need for more transparency and reporting on ESG performance and impact.
· The digital transformation and innovation, which are reshaping the way we live, work, shop and interact. The real estate sector needs to adapt and embrace the opportunities and challenges that the digital revolution brings, such as the adoption of new technologies, the emergence of new business models, the evolution of consumer preferences and the changing patterns of demand and supply. The real estate sector needs to invest in digital infrastructure, such as broadband, 5G, IoT (Internet of Things) and cloud computing, to enable the connectivity, data collection and analysis, and the delivery of smart and personalised services. The real estate sector also needs to foster innovation and creativity, by collaborating with start-ups, incubators, accelerators and universities, and by supporting the development of new solutions and products that can enhance the value proposition and the user experience of real estate assets.
· The demographic and social changes, which are affecting the composition, size and needs of the population. The European population is ageing, urbanising and diversifying, creating new challenges and opportunities for the real estate sector. The ageing population implies a higher demand for senior housing, healthcare and assisted living facilities, as well as a need for more accessible and adaptable buildings. The urbanisation trend implies a higher demand for housing, especially affordable and social housing, as well as a need for more mixed-use and liveable urban environments. The diversification of the population implies a higher demand for diversity and inclusion, as well as a need for more flexible and customisable spaces that can cater to different lifestyles, preferences and cultures.
What are the main risks and opportunities that the European real estate market will face in 2024?
In my personal opinion, and based on my professional experience in real estate, the main risks and opportunities that the European real estate market will face in 2024 are the following:
· The risk of a prolonged and uneven economic recovery, which could hamper the demand and the income generation of real estate assets, especially in the most affected sectors and regions. According to data released by the “Real Estate Outlook – Europe” of UBS Asset Management, the European economy is expected to grow by 0.8% in 2024, compared to expectations of around 0% growth at the start of the year. However, the recovery is dependent on the fiscal and monetary policy support and the geopolitical tensions. The risk of the escalation of trade disputes and the political instability could derail the recovery and trigger a new recession with global spillovers.
· The risk of a sharp increase in interest rates and inflation, which could erode the value and the attractiveness of real estate assets, especially in the core and prime segments. The European Central Bank is expected to raise interest rates further until mid-2023 before potentially cutting rates from 2024 if economic activity slows. The Bank of England is expected to follow a similar path, with a peak of 4.75% in 2023 and a cut of 200bps in 2024. However, the forward markets have a higher for longer view, with rates peaking even higher than these forecasts, and only coming down gradually over the next five years. The inflationary pressures are also expected to persist in the near term, driven by the rising energy and commodity prices, the supply chain disruptions, the labour shortages and the pent-up demand. The higher interest rates and inflation could reduce the yield spread and the real returns of real estate assets, as well as increase the cost of debt and the refinancing risk for leveraged investors.
· The opportunity of a repricing and a repositioning of real estate assets, which could create value and enhance performance, especially in the secondary and tertiary segments. The higher interest rates and inflation, the tighter credit conditions and the uncertainty of the economic outlook could lead to a correction of the property prices, especially for the assets that are exposed to the most affected sectors and regions. The property prices in the eurozone are expected to fall by -8% in real terms until end-2024, followed by around -5% in France and the UK. This could create a bid-offer gap and slow down the transaction activity, but also provide opportunities for investors with sufficient capital and private investors who can seize opportunities on a case-by-case basis. The repricing of the assets could also make it more economical to refurbish, reposition or repurpose them, in order to improve their quality, sustainability, functionality and appeal. The repositioning of the assets could also involve a change of use, a change of tenant mix, a change of location or a change of strategy, in order to align them with the emerging trends and drivers of the market.
· The opportunity of a diversification and a differentiation of real estate portfolios, which could reduce risk and increase returns, especially in the resilient and growing segments. The real estate investors are expected to diversify and differentiate their portfolios, in order to mitigate the impact of the challenging scenario and to capture the opportunities of the changing market. The diversification of the portfolios could involve a higher allocation to the living sectors, the logistics and industrial sector and the alternative sectors, which offer higher growth, lower volatility and longer-term income streams. The differentiation of the portfolios could involve a higher allocation to the green and certified buildings, the digital and innovative buildings and the flexible and customisable buildings, which offer higher returns, lower risks and better reputation. The diversification and differentiation of the portfolios could also involve a higher allocation to the emerging markets, such as Central and Eastern Europe, which offer higher yields, lower correlation and higher potential.
What are your expectations and recommendations for the Italian real estate market in 2024?
The Italian real estate market is expected to follow a similar trend to the European market, with some specificities and nuances. The Italian economy is expected to grow by 0.6% in 2024, slightly below the eurozone average, but still recovering from the deep contraction of -9.9% in 2020. The Italian government has launched a massive recovery plan, financed by the EU funds, which aims to boost the growth, the competitiveness and the sustainability of the country. The plan includes significant investments in infrastructure, digitalisation, green transition, education, health and social cohesion. The plan could have a positive impact on the real estate sector, by creating new demand, new supply and new opportunities. However, the plan also faces some challenges, such as the implementation capacity, the administrative efficiency, the political stability and the fiscal sustainability. The Italian real estate market is also characterised by a high level of fragmentation, a low level of transparency, a low level of institutionalisation and a low level of liquidity, which pose some barriers and risks for the investors, but also some gaps.