Curlow's convictions: Back to growth

Divergence in rate trajectory between the US and Europe: The differing trajectory of both growth and inflation in the US and Europe has led to a widening in the rate expectations across these regions. While there remains a high level of policy uncertainty surrounding the Trump 2.0 administration there is no denying he has come out of the gates running full steam ahead and is loosening the historically strong ties between these western allies. Within Europe, economies and their governments remain crippled by their deficits and we are seeing a changing of the guard in regard to the growth leaders - away from Germany and France with Spain now taking a leading role. For property investment the main transmission mechanisms are the aforementioned divergence in rates – and subsequent currency movements – alongside potentially long-term supply chain reorganisation and trade impacts resulting from tariffs. Renewable infrastructure investment in the US may also be impacted but this will likely only strengthen Europe’s need to remain a leader in the energy transition.

Capital value growth is returning: Within the property segment, the logistics sector continues to lead the way in both the US and Europe, but even high-quality offices are seeing an improvement in pricing as return to the office gathers pace and investor confidence returns to the sector. The resilience of the wider living sector is also continuing to garner strong investor interest particularly in those regions where investors have limited exposure. While the valuation swings were more muted in the infrastructure market values have stabilised and even started to recover in the favoured renewable energy and digitalisation segments.

Sector fundamentals in Europe are proving more resilient than the US: The new supply pump in the US was well primed in the run up to the pandemic and while it has slowed recently the wave of development completions which did come online in the past five years has disrupted the supply-demand balance and slowed rent growth. By contrast, Europe continues to suffer from its age of stock issues and tight fundamentals at the prime end of the occupier market. When combined with the strong focus on location and building quality, prime rental value growth continues to eclipse inflation with most European markets now boasting record nominal rental levels. In these top performing markets, we are starting to see signs of occupiers widen their locational focus beyond key city centres and into well-established fringe locations to take advantage of the widening price gap that has emerged. However, there remains a key focus on building quality where no compromise is being made.

Limited scope for significant investment yield/multiple movements combined with continued macro and political uncertainty make the case for diversification: While the divergence in rates provides some scope for inward yield movements in Europe the ultimate quantum will likely remain muted in a historical context. Income growth prospects will therefore likely remain the key driver of outperformance for the foreseeable future where asset management initiatives can have a stronger impact than market or sector calls. Considering this dynamic alongside heightened macro and policy uncertainty it is reasonable to make the case that wider diversification will likely prove a good level of vintage insurance should adverse scenarios take hold.

Transaction activity starting to show signs of life: Completed transactions saw a notable rise in Q4 2024 with active deals on the market suggesting we could see a further acceleration as we progress through 2025. In volume terms, activity remains most active in the residential and logistics segments but there is a notable return of interest for high quality office buildings which are starting to see a bit of a resurgence in activity. In growth terms it is the shopping centre market that is seeing the strongest level of growth in Europe albeit coming off a low base. This growth and widening in transactional activity is being supported by a more diverse base of investors beyond the high net worth and private buyers to now include the listed players, sovereign wealth funds and some insurance/pension funds. Also notable is the narrowing in pricing and heightened trading levels in the secondary market for private fund investments. Further evidence that confidence in the real asset market has returned and price discovery is increasingly being realised. 

Renewed equity investment activity to bolster both debt and equity investment proposition: The abating denominator effect and growing consensus that this will be a good vintage for investment has brought institutional investor interest back to the sector as they once again find themselves under allocated – especially in the infrastructure space. The rise in equity investment activity will widen the investable debt universe by adding fresh origination opportunities to lenders that have been focused on the refinancing needs of their borrowers. In the US, there has also been a notable rise in short-term extensions and loan modifications particularly in the office and multifamily space where there are growing signs of defaults and delinquencies but a notable absence of completed distressed asset sales. The widening of active equity investors is broadening the sales market to include both high quality and stabilised core assets through to higher yielding and challenged asset management intensive options. In Europe, new development opportunities are also becoming attractive given the strength of the underlying occupier market and limited availability for top-quality assets occupiers demand. 

All data sourced by AXA IM Alts as at February 2025.