Market will stabilise within three quarters, predicts JPMorgan’s Saletti

European real estate valuations have not adjusted as quickly as some had anticipated in recent months, although general market stability is likely within the next three quarters, according to Massimo Saletti, global co-head of real estate, gaming and lodging at US bank JPMorgan.

Speaking at an event in London on 4 July, hosted by the organisers of the District World Summit real estate conference, which is held annually in Barcelona, Saletti said interest rates are the key factor for markets.

“The big indicator will be falling interest rates… if interest rates remain at this level, we will see less real estate deals,” he said.

Saletti was joined on a panel discussion by Jonathan Hull, managing director at real estate advisory firm CBRE. The pair discussed what Hull described as the “troubled” office market in Europe, agreeing that the current opportunity lies within real estate debt amid a refinancing shortfall. However, Saletti believes European sponsors are having an identity crisis when it comes to borrowing.

“In Europe, raising equity is seen as a failure,” he said, adding this stigma will be emphatically challenged in the coming years. He further stated when European sponsors are having to raise equity it usually means they have “exhausted” all their options, with the one option left on the table to sell assets, which in the current climate makes no sense because “no one is buying” currently.

Transition period

The discussion echoed the sentiment that offices are in a transition period, as some assets might not ever meet regulatory guidelines around sustainability, and the introduction of remote working has added further strain on the asset class. Hull, however, believes the cities that will cope well with hybrid working will be those with good infrastructure.

Hull said that cities that take on major infrastructure projects to make commuting to the office easier will deal with the transition period well. He has seen the convenience of the Elizabeth Line in London, which has made long trips around the metropolis easier.

“Now [with the Elizabeth line] you can get right across London to Heathrow in minutes, and that’s a game changer. That progress will be the same for any other city that begins to develop those kinds of major infrastructure projects. It’s a massive time of change.”

Although the pair remain optimistic around ESG-compliant office buildings in good locations, Hull said certain measures need to be taken to get employees back in the office and increase office occupancy, so that Europe does not witness the empty offices seen in some US markets, such as San Francisco.

“[Employers] will have to force people back to the office, but at the same time, we need to provide them a good product to work in,” Hull added.

The sentiment around ESG has become paramount to investors’ decision-making processes, each agreed, with investors now putting more onus on assessing clients’ ESG rankings.

“ESG is becoming real, some investors only have capital for ESG investments,” Saletti said.

Hull added: “Investors will not buy a non-compliant asset, even if the price is right.”

Separately, Hull said logistics assets in Europe have repriced far quicker than other asset classes. And despite a five-to-seven-year negative sentiment around retail, prospects for the sector were improving, particularly shopping centres.

“We are already seeing the performance of European shopping centres back to pre-COVID levels… retail repriced the earliest because it had several challenges pre-COVID, during COVID; it then had an operational challenge of getting people back to the shopping centres – so, it repriced again.

“The capital markets are heavily affected with rising interest rates, but you can find real value in retail. It doesn’t mean everyone’s going to do it, but I do think the sentiment is going to shift.”