Real estate market dislocation looms but opportunities remain for investors
14 / 02 / 23 - 2 minute read
Market dislocation is looming for the real estate industry as a result of higher debt costs compounded with steeper capital requirements to meet green credentials required by legislation and demanded by investors. However, a fragmented market could provide investors with the chance to acquire assets at attractive prices.
The world of real estate has changed drastically over the last 20 years.
Historically, low interest rates have made cheap money the norm, but this is no longer the case, with a combination of rising inflation, interest rate hikes, and a potential market downturn.
Meanwhile, the recovery from the economic impact of the Covid-19 pandemic has been derailed by macroeconomic uncertainty triggered by a global recession and the war in Ukraine.
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Overall, this makes it challenging to achieve income growth while offering tenants affordable rents. In other words, investors can no longer count on yield compression for returns, as PATRIZIA states in its new report, ‘Managing Real Estate in the New Norm’.
Further obstacles lie ahead. In the next couple of years, a large number of transactions made in the last 4-5 years are due to come up for refinancing – and this will have to happen in a very different interest rate landscape than the previous one. For example, in the UK alone, more than £60 billion of real estate debt needs to be refinanced in the next two years. In Europe, the number is even higher.
As the time of easy money comes to an end, investors are being forced to reassess their rationale for real estate investment. Indeed, in a volatile market environment, real estate investors are encouraged to shift their focus away from yield compression and capital growth and towards income growth and resilience in order to guarantee inflation hedging and debt service.
At the same time, investors are under pressure to increase their CAPEX spend to meet stricter energy efficiency rules. In 2021, the EU Energy Performance of Buildings Directive proposed that European Union member states introduce minimum energy performance standards by 2027. Tightening rules for decarbonisation could sway certain investors to quickly discard their assets rather than spend time and money modernising and retrofitting them.
Opportunities in the new norm
Such volatile macroeconomic conditions tend to drive market dislocation and may stifle institutional real estate investment. This needn’t be the case, however. Investment managers, like PATRIZIA, can help investors generate returns in a fragmented market.
By combining decades of local expert knowledge with sophisticated algorithms and machine learning methods, PATRIZIA has gained a deep understanding of locations and market trends. For example, PATRIZIA has spotted the urban logistics market early and has assembled a significant portfolio for its core and value-add programmes. Another example is the PATRIZIA Amenities Magnet 15 Minutes which pulls in data intelligence to benchmark to which degree a residential or commercial property location will supply tenants with basic urban needs, such as commuting and education, within a 15-minute bicycle ride or walk.
Additionally, PATRIZIA’s smart building platform, Ambio, enables users to enhance their building stock’s green credentials.
With the right guidance, investors can find value, even in a market beset by dislocation.