Inflation and Ukraine prompt market pessimism – survey

Real estate debt professionals are increasingly concerned about the impact of macroeconomic and geopolitical factors on the European property lending market, responses to the Q2 2022 sentiment survey conducted between 4 April and 27 April by industry body CREFC Europe show.

“Prior to this survey, we had four consecutive quarters of optimism, despite last year’s concerns around economic conditions,” says David Dahan, industry initiatives director at CREFC Europe. “But the optimism we saw before the Russian invasion of Ukraine had dissipated by the time we conducted the Q2 survey.”

Concern was pronounced among respondents from continental European markets, Dahan adds. “The purchasing power of individuals was perhaps the number one issue in the French elections, and energy costs across the continent is a huge topic of discussion.”

The survey showed increasingly negative sentiment around expectations of new business volumes and the liquidity of debt. But Dahan stresses external factors such as inflation and rising interest rates are the major concern among respondents, rather than market fundamentals.

“The concern is primarily around external factors and the degree to which there is a correlation between them and real estate segments,” said Dahan. “Sentiment towards the political environment was at its worst since we created the survey in 2019. There was positive movement here as we came out of the pandemic, but we are back in negative territory due to geopolitical tensions. People believe the impact hasn’t been fully felt yet in our industry, because it can lag the wider economy by a couple of quarters.”

Sector impact

Sentiment towards all sectors was down, with offices and retail more affected. “Retail has gone down again, not surprisingly, as it is the sector most closely linked to recessionary pressure,” says Dahan.

“Sentiment towards PRS residential student accommodation and alternatives, such as healthcare and senior living, is more resilient. Hospitality is doing relatively well because it is benefitting from the pent-up demand of the pandemic.”

Respondents’ views on appropriate risk did not change dramatically, although Dahan notes some additional caution.

“People are taking risk off the table a bit. There is an expectation that risk-return opportunities will be more attractive at the lower-risk end of the spectrum, either by asset type, loan type or location,” he says.

CREFC Europe calculates a sentiment index score for the responses to survey questions by subtracting negative responses from positive and stripping out neutral to provide a single data point that can be tracked quarter-by-quarter to indicate change in sentiment.