Even though the eurozone narrowly avoided recession in the fourth quarter of 2022, growth slowed to a mere 0.1% quarter on quarter.

On top of the deteriorating growth picture, the European Central Bank lending survey indicates banks are tightening lending standards even further.

No doubt the combination of lower growth, less debt and higher interest rates adversely affect market sentiment in Europe, but it appears that sentiment is quite different depending on where you are. The January EPRA Insight series held in Brussels, London, Frankfurt and Paris provided good insight into the local state of mind.

To no surprise higher financing costs and upcoming re-valuations were the main topic everywhere. Without exception everyone expects values to fall, but the impact on balance sheets and investment strategies varied per country. This is underlined by loan-to-value ratios. Even though real estate investment trusts tend to carry lower loan-to-values than the overall market, the relative positioning provides some indication of refinancing risk variations between the four countries.

Let’s summarise the mood with one word for each country.

The sharply increased cost of debt and the resulting decline in available debt financing was clearly on the mind of the German companies. Particularly since pre-pandemic financing rates were among the lowest in Europe at below 1% and buyers had increased leverage to hit target returns after acquiring at prime yields well below 3% in some cities.

Additionally, the continuously falling interest rates triggered some investors to finance on short-term loans or at flexible rates. Already last year owners struggled to refinance because of debt costs having risen by over 400 basis points and banks applying stricter debt cover ratios resulting in smaller loan amounts offered. The resulting financing gap proved difficult to fill as the German multifamily REITs discovered.

With valuations expected to fall at year-end reviews, pressure is likely to increase in 2023. After disappointing sales volumes in the second half of 2022, sellers may be forced to lower prices, while there is hope that buyers could up their bids as the economy bottoms towards the end of the year, in which case the investment market may re-emerge.

One reason for the French confidence would be the ultra-low vacancy rate in the Paris central business district where many of the presenting companies own assets. Rent increases had also been mostly accepted across all sectors. Particularly, the Paris CBD market is strong with vacancy down to 2% and take-up rising 32% in 2022 compared with 2021 in the broader Paris Centre West submarket. Most new developments are prelet and with development financing becoming scarcer, these standing asset portfolios are well-placed to weather the storm.

However, this overall confidence could be misleading as in secondary markets vacancies are rising and substantial discounts are offered to headline rents.

Finally, France and Paris are preparing for the positive impact of investment around the 2023 Rugby World Cup and the 2024 Olympic Games.

The Benelux companies expressed similar sentiment to the French albeit a tick more cautious as they lack the tailwind of an ultra-tight CBD market.

Rents were rising, though, with most tenants accepting the January indexation proposals. Contrary to the situation before the pandemic, retail assets outperformed. The circa 100 basis points yield shift was bearable since prime shopping centre yields had already moved out to 5%-6% due to the e-commerce onslaught, while retailers had been rightsizing shop portfolios towards high-sales-per-square-metre locations enabling them to absorb rent hikes.

On the other hand, tighter lending standards, a dormant investment market and restrictions on issuing equity below net asset value could lead to more stringent cash management and an inability to fund accretive acquisition opportunities when they arise.

Following the chaos created by the mini Budget and the consequent rapid rise of financing costs, it is surprising to see the UK companies being the most upbeat looking into 2023. Maybe the explanation is that despite the negative growth outlook, most of the repricing might have been achieved even though Big Nine office investment plummeted to a 14-year low and London office investment to a 20-year low in the fourth quarter of 2022.

The Bank of England is expected to stop hiking rates this year which could stabilise borrowing costs. Even though capital might be less abundant the REIT CEOs stated to be net buyers this year and would be mostly focusing on buildings in good locations with upgrade potential. Some of them were around during the aftermath of the global financial crisis and saw the great opportunities that came to the market then.

A final reason to be optimistic was the record-breaking revenue performance of the hospitality sector in 2022, but with retail sales falling again in December consumers may scale down their spending this year. Nevertheless, investors are still willing to pour money into UK retail as demonstrated by retail investment in Glasgow hitting an eight-year high.

Sentiment across Europe should be different because markets go through the current downturn at different speeds and specific local market fundamentals provide different opportunities.

One common theme, though, could be identified and that is that the abundance of capital fuelled by cheap debt has come to an end. And this offers ample opportunities for well-capitalised real estate companies, domestic or foreign, to invest in European real estate.