Across the world, property markets have been hit hard by rising interest rates and disruption in capital markets. This has caused property prices to adjust, but this may not always be a bad thing, especially for investors. Kieran Farrelly, Head of Global Solutions, Real Estate, Schroders Capital, explains why the current environment presents an interesting window of investment opportunity.
Interest Rates and Property Prices
The impact of rising interest rates, combined with broader macroeconomic uncertainties, has resulted in upward movements in yields or cap rates. This, Farrelly explains, has led to rapid repricing across markets and sectors since late June 2022.
Market valuation points to opportunities in particular in markets that have repriced fastest. In the immediate term, the UK and Nordics stand out, followed by the US and other continental European markets that have fully or almost fully adjusted to a higher interest rate regime. In Asia-Pacific, cyclical opportunities exist in markets aligned with China’s delayed recovery and/or offering alternatives in nearshoring/friendshoring supply chains.
Property Sector Performance
Sector performance has also shown substantial differences. Overall, real estate sectors that offer contractual or indirect inflation protection continue to be the most attractive. Industrial and logistics assets, for example, have undergone significant repricing and appear to have stabilised, while remaining supported by long-term structural fundamentals.
More attractive secondary markets
Investors in private real estate can benefit from attractive pricing across a range of investment structures. For example, there is a real opportunity in secondary real estate markets, where institutional investors are exiting for a variety of reasons. Often this has little to do with the outlook for the underlying asset class, but more to do with portfolio rebalancing considerations. As a result, there are opportunities in deep-discounted secondary markets, for example in the UK, due to a series of motivated sales of defined pension plans and, more selectively, on a global basis.
Supply and Demand Fundamentals
Residential demand faces a general headwind from anemic economic growth, as is the case for many segments of the economy, and tight supply conditions (driven by rising costs in construction and debt financing) mean that the scarcity of high-quality, ESG-compliant space will fuel an upward trend in rents once economic growth picks up in 2024 and 2025. More broadly, secular trends including demographic changes, deglobalization and decarbonization efforts are heavily concentrated in real estate markets. These trends provide substantial benefits to the long-term prospects of specific sectors, well beyond current market dynamics.
Furthermore, historical trends suggest that markets tend to rebound from a downturn. This is evident in the performance of private equity real estate funds, where investment opportunities have historically delivered above-average returns following price corrections.
Overall, greater accessibility to the long-term benefits offered by this asset class, combined with the sequential opportunities that are currently emerging, offers private investors an attractive entry point into the global commercial real estate sector.
This article is originally published on idealista.it
