Cushman & Wakefield’s new report Perspectives on European Inflation explores causes of the current bout of inflation and how it differs by region. This topic is of extreme actuality given the difficult economic context across global markets, driven especially by the Ukrainian war.

The experts assess that the performance of real estate fundamentals depends on a variety of factors, and for investors, additional ones come into play. Cushman & Wakefield analyzed commercial real estate (CRE) performance across countries and asset types to provide a retrospective view on how select European nations have fared relative to inflation, as well as Europe in the aggregate where data is available.

In Europe, experts analysed institutional real estate returns over a consistent period (2000-2021) across key European countries, including Germany, France, Italy, the Netherlands and Spain, henceforth “Core Europe.” Due to data limitations, their analysis has been confined to a period of low and predictable levels of inflation. Over the period, Core European inflation averaged 1.7%.

Core European institutional property returns outpaced inflation over the period 2000-2021. Income returns exceeded inflation in all holding periods across all property sectors. Additionally, the beat percentage for income returns—the share of holding periods in which real returns exceeded zero—is better than it is for total returns.

Across the European countries Cushman & Wakefield examined, property investment has beaten inflation over a range of holding periods. Each of Germany, France, Italy, Netherlands and Spain’s all-property returns outperformed inflation in 100% of 10-year holding periods and at least 80% of 5-year holding periods. The same holds true for the various property sectors.

Prime offices outperformed inflation on average across Core Europe in 82% of 1-year holding periods, 89% of 3-year periods, 91% of 5-year periods and 100% of 10-year periods using rolling data. The average beat percentages were moderately lower for retail, with prime retail assets beating inflation in 82% of 1-year holding periods, 84% of 3-year periods, 88% of 5-year periods and 99% of 10-year periods. Logistics outperformed inflation in 82% of 1-year holding periods, 87% of 3-year periods, 91% of 5-year periods and 99% of 10-year periods.

Average offices also outperformed inflation on average in 87% of 5-year holding periods, slightly lower than the beat percentage for prime offices (91%). For retail, the beat percentage is higher than prime retail (88%), with average retail beating inflation in 91% of 5-year periods. Similarly, logistics outperformed inflation in 92% of 5-year periods, with the beat percentage slightly higher than prime (91%). However, an important observation should be noted about the all-property capital return beat percentages. Capital returns have outpaced inflation most of the time, but the beat percentages for longer holding periods fall, with the exception of France. The opposite is true for prime. This can partly be explained by the fact there has been more cap rate compression for prime relative to average, hence delivering stronger returns for prime. Prime properties are also associated with lower yields as capital growth over time will be higher because of increasing rents. Using France as an example, the total return of prime has been 13.1% per annum (income return of 5.9% and capital growth of 7.2%), while the return for average properties has been 8.7% per annum (income return of 5.2% and capital growth of 3.2%).

The main conclusion of Cushman & Wakefield is that property returns, both prime and market average, outpace inflation. Longer holds deliver better inflation protection, particularly with prime assets.