European real estate assets that are linked to energy efficiency improvements, demographic change or digitalisation are best-placed to create value while inflation persists, according to the chief client officer for the investment manager BNP Paribas REIM.

Laurent Ternisien is warning that the inflationary context is “here to stay”, dragging on the economy and impacting real estate strategies for “years to come”.

In its outlook for the European real estate market in 2023, BNP Paribas REIM said persistent inflation will put pressure on central banks to increase interest rates, reducing transaction volumes in the short term.

In the absence of a significant decrease in financing costs and yields, investors should focus on opportunities that will benefit from trends such as demographic change and digitalisation. It is also advising that energy efficiency renovations and retrofits will “improve” financial performance.

“The solid fundamentals of real estate and the future challenges, especially with relation to carbon emissions, will drive value creation,” it said.

“The current macro-economic headwinds should not influence the trend towards greater sustainability… Further regulation and the desire to lead market standards means the need to renovate the existing stock is going to increase in order to reduce global carbon emissions.”

Meanwhile, the paper said more prime office and logistics deals would arise, and at higher yields than investors thought possible only a year ago.

BNP Paribas REIM also foresees a broadening of the investment universe in 2023, anticipating greater amounts of investment in education, data centres, leisure facilities, as well as social impact strategies. Additionally, private real estate organisations will be seeking “more innovative ways to diversify portfolios away from the business cycle”.

Long-term trends

Demographics are set to greatly influence the property market, the report wrote. The firm highlighted that an ageing population will greatly impact residential and healthcare assets, and invariably affect retail and logistics as consumption habits shift.

A steady increase in longevity also affects human behaviour over the different stages in the lifecycle, it said. People are studying for longer, starting their working lives later, marrying later and also renting for longer. This has been at the forefront of new property types such as co-living or serviced apartments.

The firm also envisions higher urban density in Europe will also change the way investors approach real estate. It argues that densifying a city while maintaining a good quality of life will be one of the main challenges for developers and investors.