Frans Verhaar: Real estate is back in the black — or is it?
This column was originally written in Dutch. This is an English translation.
By Frans Verhaar, Managing Director, Head of Continental Europe at bfinance
It seems that the real estate market is back in the black. After years of turbulence, in which illiquidity, valuation pressure, and revaluations dominated the headlines, the figures are suddenly looking more positive again. But before we pop the champagne, a fundamental question arises: what does this “recovery” actually mean? And for whom?
Institutional investors have keenly felt the impact of the property correction in recent years. Portfolios shrank in value, liquidity became scarcer and managers faced pressure on cash flows and financing structures. This led to strategic questions that have not disappeared now that the figures are temporarily improving. On the contrary. Now that positive returns are becoming visible again, there is a strong temptation to conclude that the worst is over. But is that really the case? And what does that say about strategic choices in allocation and selection?
The recovery cannot be measured in figures alone
An important nuance is that positive returns do not in themselves imply a full recovery. The recent figures are largely a reaction to the sharp losses of the previous year. They say little about structural changes in the market or fundamental valuations. In an illiquid asset class such as real estate, adjustments are slow and phased. What is perceived as stabilisation today may still come under pressure later.
For institutional investors with long-term commitments, year-on-year figures therefore offer limited guidance. The question is not whether returns are improving temporarily, but whether the underlying dynamics are sufficiently robust in an environment of higher financing costs and less ample liquidity.
Managers make the difference
If the recent period has taught us one thing, it is that there are significant differences between managers. Not all real estate strategies have weathered the correction equally well. Some funds proved to be more resilient than others, which has visibly increased the spread within the asset class.
This puts the idea of a broad market recovery into perspective. Real estate as a category is not simply “back”. The reality is more fragmented. Differences in strategy, financing structure and execution translate directly into divergent outcomes. This shifts the focus from the question of whether real estate is attractive to which strategies and structures fit within the portfolio.
Strategic questions remain unanswered
The temptation to simply allocate more capital to real estate on the basis of improved figures is understandable, but risky. The correction has exposed questions that will not automatically disappear with an upturn. What is the right balance between core, core-plus, opportunistic and debt-oriented strategies? How do different risk profiles relate to the role that real estate should play in the overall portfolio?
The tension between liquidity, return and risk also remains. Real estate is being reassessed for its function within the whole, not just for its absolute performance. This requires more nuance than simply following headline returns.
More nuance, less certainty
The strength of real estate traditionally lies in local market knowledge, cash flow management and discipline in valuation. It is precisely these elements that are coming under pressure in a changed market environment. This calls for sharper considerations regarding strategy, selection and risk management, and for realistic expectations about what real estate can and cannot deliver.
A new normal, or just a breather?
Back in the black sounds appealing. It suggests that the storm has subsided. But the question remains whether this is really the beginning of a new equilibrium, or just a temporary respite in a longer process of revaluation and adjustment. The coming period will reveal whether positive figures will hold up when further refinancing and market transactions take effect.
Where value can be found cannot be captured in simple categories for the time being. The differences within real estate have become greater and with them the importance of making sharp choices. Is real estate back? Perhaps. But those who jump to conclusions run the risk of drawing the wrong lessons from a recovery that has not yet crystallised.