‘Phoney war’ over interest rates continues to cause pricing concerns
A sentiment survey of global property industry leaders has highlighted the “phoney war” going on between buyers and sellers as uncertainty over where interest rates will settle continues to muddy the waters on pricing.
The ULI and PwC report, Emerging Trends in Real Estate Global Outlook 2023, said the biggest obstacle to getting deals done this year is uncertainty over where and when interest rates will settle. With the general expectation that interest rates will stay higher for longer, the current price discovery challenge – amounting for some to a “phoney war” between buyers and sellers – is exacerbated by low investment volumes and low liquidity.
Lack of debt and equity capital available and concerns about refinancing of existing loans are all feeding into this “wait and see” mode across the industry. Another key question is whether rental growth can be delivered against a background of stagnant economies, declining consumer sentiment, ongoing structural change and increasing capex requirements.
A sentiment survey of global property industry leaders has highlighted the “phoney war” going on between buyers and sellers as uncertainty over where interest rates will settle continues to muddy the waters on pricing.
The ULI and PwC report, Emerging Trends in Real Estate Global Outlook 2023, said the biggest obstacle to getting deals done this year is uncertainty over where and when interest rates will settle. With the general expectation that interest rates will stay higher for longer, the current price discovery challenge – amounting for some to a “phoney war” between buyers and sellers – is exacerbated by low investment volumes and low liquidity.
Lack of debt and equity capital available and concerns about refinancing of existing loans are all feeding into this “wait and see” mode across the industry. Another key question is whether rental growth can be delivered against a background of stagnant economies, declining consumer sentiment, ongoing structural change and increasing capex requirements.
By sector, it is offices that represents the greatest level of uncertainty. Logistics, on the other hand, seems to have largely repriced in major markets and there is growing optimism that long-standing structural changes have now been priced in for retail.
In terms of lending, it is so far unclear whether non-bank lenders will seize opportunities and plug the funding gap. Finance is scarce for ground-up and redevelopment projects, with high construction costs, labour shortages and uncertain occupier demand combining to add too much risk for most banks.
As existing loans are refinanced, distress on the scale of the global financial crisis is not expected, but the report says “many investors will feel the pain”. At the same time, there is a huge need for repurposing and accelerating the ESG agenda, not least to maintain buildings and earn rental income. This puts the industry in a tough position, as it may no longer be possible to postpone upgrades and capex investments.
This challenge is especially prevalent for offices and there is a strong sense the sector will experience similar disruption to retail. Most industry leaders are working on the assumption that office occupancy will trend downwards and they share a strong belief in bifurcation between prime and secondary, ESG compliant and non-compliant.
ULI Europe chief executive Lisette van Doorn said: “Real estate leaders are adjusting to interest rates that are expected to stay higher for longer and getting to grips with a new normal of higher finance costs and minimal capital growth.
“The keys to success – operational management and rental growth – depend on making assets fit for purpose and ESG compliant. The industry can no longer ‘wait and see’, hoping that construction and financing costs will decrease, as occupiers will critically review their total occupancy costs at lease renewal and alignment with their space and ESG strategies is key. A failure to act may imply loss of rental income very soon.”
The report also highlights how “troubled” real estate leaders have been by the rush of withdrawals from private open-ended funds by institutional and retail investors. For institutional investors, the withdrawal is partly a response to the “denominator effect”, the report says, but these funds represent a relatively liquid investment, and the rush to the exit is evidence of investor concerns.
Gareth Lewis, ETRE leader, director at PwC, said: “Redemption requests from open-ended funds point to doubts around current private property valuations, reflecting a disconnect between the public markets and private real estate.
“The slow speed with which real estate is revalued relative to equites and bonds is causing a problem for institutional investors, especially in the US, Europe and Australia. This denominator effect is taking some institutions very close to their cap on real estate holdings and could impact an important source of investment for the sector.”
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