The big picture

Long-term convictions, short-term tactics

But our respondents also cited a number of anxieties and headwinds. In the words of M&G’s Jing Dong Lai: “uncertainties over inflation, interest rates and recessionary risks have affected real estate values globally.” 

Although a large majority of investors say that the correction in real estate value offers a good buy opportunity, it is clear that most believe the correction is still in progress.

So while they are optimistic about the long term, they are cautious in the short term – a stance that accounts for many of the deal levels and valuations seen in recent market data.

Many would echo Jay Kwan of QuadReal: “Our … long-term convictions in real estate haven’t changed, but our short-term tactics have … evolved to meet our view of the market today.”

Finance is a key concern for nearly all the investors we polled, with 95% concerned about interest rates.

Most investors (87%) also expressed concern that the instability of global banks might make access to capital more difficult.

Unless such instability becomes systemic, its impact will probably be limited to a small number of institutions.

A bigger issue may be the reaction of other banks to such instability, as they attempt to strengthen their loan books.

But there are other threats to real estate finance (as we explain more fully on page 21). Issues around refinancing and access to affordable debt are likely to become increasingly pressing for the rest of 2023 and across 2024. Probable consequences include an increase in the forced sales of property, more businesses searching for additional equity, and a growth in the number of owners in distress.

Says CMS partner Jules Needleman: “With interest rates at a 15-year high, and probably heading higher, over the next couple of years I expect to see some forced sales as investors struggle to afford refinancing options.

“There are already signs of this in the US, with increasing reports of defaults and of assets being sold at significant discounts. And while there are undoubtedly specific US factors at play, it is also clearly a warning of what could become a major problem in other markets, causing valuations to fall still further.”

How concerned are you about the following, in relation to your real asset portfolio?*

^{*As a consequence of rounding, data totals do not always equal 100%.}

Other headline concerns

Unsurprisingly, current rates of inflation are another major concern, with 95% of investors worried that they will have a long-term impact on their portfolios. Over half (51%) of investors describe themselves as “very concerned”.

High energy prices worry 97% of investors, with half (49%) saying they are very concerned. Wholesale energy prices have fallen drastically since their highs in 2022. But with typical prices still significantly up on their levels two years ago, occupiers and others may still be affected – especially as contracts expire and new deals have to be negotiated.

The substantial fall in energy prices is also of no immediate benefit to businesses that signed contracts on the basis of the high prices prevailing in 2022.

One knock-on effect of the recent high energy prices – and of financial stresses generally – has been heightened tenant weakness. Most investors (93%) are concerned about this, with 55% having seen an increase in tenant failures in the last year. Numbers are particularly high in Asia Pacific, where 73% report a rise. We look at this in more detail on page 20.

Global conflict is also a concern for 93% of investors, with 48% “very concerned” about it. Many will be at least as anxious about how such conflict could affect supply chains, energy prices and the wider economy as they are about its direct impacts. But investors are also aware that if conflicts or potential conflicts reshape the market for real estate assets – e.g. if reshoring, driven by security and supply chain concerns, increases the demand for industrial or logistics properties – they will bring opportunities as well as challenges.