At the presentation of DWS’s forecasts for 2023 earlier this week, Jessica Hardman, head of European real estate portfolio management, said she expected the impact on yields of rising interest rates seen this year to reverse in 2023.

‘The yield advantage of real estate investments over 10-year government bonds has shrunk significantly this year; real estate valuations have come under pressure,’ said Hardman.

However, this trend is likely to reverse next year, she noted, with the yield gap to government bonds set to rise and real estate investments becoming more attractive for investors again.

In terms of sectors, residential real estate remains promising, given its strong demand and limited supply characteristics.

Hardman also highlighted infrastructure as a sound investment bet, in light of the energy transition and related economic transformation. The potential to index-link rents for infrastructure assets was an additional factor in its favour, she said.  ‘The major tasks of decarbonisation and digitalisation in the areas of public transport, energy and circular economy open up interesting, defensive investment opportunities for investors in the infrastructure sector, which furthermore offers contractual inflation indexation and reliable, long-term income streams.’

She added: ‘Lower volatility compared to other asset classes, less correlation to the performance of equities and fixed income, and improved pricing resulting in a good risk-return profile in the near term continue to speak in favour of the alternative investment asset class.’

Sketching the wider economic outlook, Björn Jesch, global CIO at DWS, said inflation and interest rates would remain a dominant theme for capital markets in 2023. ‘We think central banks will keep interest rates high for longer than markets currently expect,’ he said.

Jesch expects the US Federal Reserve to raise key interest rates to between 5% and 5.25% next year, while in the eurozone the key rate is likely to rise to 3.0%. ‘We do not currently see a rate cut next year,’ he noted.

Turning to inflation, he said rates are expected to fall in 2023, ‘but will still remain at a high level – 6.0% in the eurozone and 4.1% in the US.’

The looming mild recession in the US and the eurozone will be very different from previous downturns, Jesch said. ‘Thanks to the demographically driven labour market, which is robust even in a downturn, workers will keep their jobs – for the most part – household incomes will remain stable and consumers will continue to consume.’

However, the recovery after the downturn will also be very modest, he remarked. Jesch forecasts growth rates of 0.3% (2023) and 1.2% (2024) for the eurozone, and 0.4 and 1.3% for the US.

Global tensions between the US, China, Russia and Europe will continue to dominate political and economic events in the coming years, Jesch predicted. ‘The world will be a different place than it has been in the last five to 10 years.’

Combatting climate change will be a major challenge and require huge investments, and Europe will have to break new ground in energy supply, he said.