Active Capital Q4 Outlook: Opportunities and trends for global real estate investment

Despite tightening credit conditions, investor opportunities are available in a number of real estate sectors across the globe.

High rates have been a major contributor to slowing investment activity. High relative bond yields look attractive to multi-asset investors and direct real estate is historically highly debt dependent, so a rapidly increased cost of debt has been acting as a brake in many locations and more generally, uncertainty of economic outlook complicates the investors’ decision-making process further.  

As a result of rates adjusting at pace, many leveraged investors, from investment managers to private equity, are likely to be focused on reworking their existing assets that will come to be refinanced over the remainder of the year, rather than focused on buying.

However, there is significant weight of money out there waiting for the right moment to be deployed. Some investors are waiting for repricing to catch up to where they perceive it needs to be. Others are waiting to call the bottom – notoriously difficult and usually swift. In some markets there is evidence of almost ‘investor chicken’, waiting for the key global names to step back into the market, signalling now is the time to buy.

Another driver of lower volumes is that the historically largest and most liquid global sector for cross-border flows – the office sector – has slipped to number two as investors unpick the complexities of an already evolving sector, even before the pandemic (see our latest (Y)OUR SPACE research for a deep dive into this).

 

Global real estate opportunities

 

This thinner pool of capital is creating opportunity, however. We are seeing evidence of high-net-worth investors and Sovereign Wealth Funds, typically unimpeded by leverage, using this pause as an opportunity to pick up ‘once in a generation’ safe haven, trophy assets with less competition.

Through the financial crisis we also saw a tick up in the third, charities, sector sector taking advantage of thinner competition to enhance their portfolios and while a small proportion of overall volumes and historically often a domestic source of demand, this investor pool should not be overlooked.

The data is also indicating, especially in those sectors with structural tailwinds, activity from the major US private equity houses, notably in the logistics sector, which is #1 for the first time for year-to-date global cross-border activity. Assets across the UK, India, Nordics and Canada have all been targets of this leading indicator investor type over the last quarter and we expect this trend to continue for the rest of the year.  Middle Eastern and Asia-based Sovereign Wealth Funds have also recently been targeting logistics assets across the US and Europe, particularly UK, Germany and Spain.

The broad residential sectors have also seen activity by US private equity in the US, Japan and Spain and this is also expected to continue through 2023.

Less debt dependent investors in countries where there is relative currency strength, such as North America and Singapore are likely to continue to be active internationally.

We are also seeing an increase in Japanese investors, across all investor types, as they take advantage of significantly lower swap rates. We expect Japanese investors to continue to be buyers internationally, as well as Japan itself to be a destination for inbound capital over the final quarter.

"We are seeing a significant surge of Japanese investment going into Europe, the US and Australia.

Traditionally, Japanese investors have struggled to access these market due to the rapid speed of transactions from local buyers or US buyers. Japanese investors can now deal off-market and get access to assets without such fierce competition, as well as take advantage of the cheap cost of capital coming out of Japan.

In 2023, Japanese investors have ploughed more than $6.7bn into standing assets abroad, already doubling the tally of $2.8bn in 2022. Inbound, Japan continues to remain attractive to cross border capital due to the significant yield spread, favourable currency and low interest rates. Debt is still accretive in Japan and it is one of the only markets globally where prices have been going up. "

Neil Brookes, Global Head of Capital Markets, Knight Frank

 

So, what is in store for Q4?

 

The overall message for the rest of the year is don’t take the economics at face value – or what you are seeing in your own market as a sweeping statement for what is happening everywhere. Equally, in times of headwinds it can be easy to perceive that the situation is unique or even the worst in your own investment locations. For example, despite headlines, London, UK is the number one metro - by some margin - for year-to-date inbound all-sector activity, despite going through an evolution of international trade policy.

The European office sector is not acting like the US office sector. Sweden might be experiencing among the lowest growth, but this is on the back of GDP which is already significantly higher than pre-pandemic levels.

Spain has almost come of age and is bucking the trend with GDP growth for this year predicted to reach 2.3% according to Oxford Economics, while Spanish inflation at the time of writing was 2.6%, spurring investor interest in the growing residential sector and beyond.

Investors are likely to focus on the ‘beds and sheds’ narrative over the rest of the year, which is also likely to provide opportunity for contrarian investors as locations, such as US and European office risk being over-sold.

As ‘even higher for even longer’ rates have pushed through into the base rate, in many countries, lenders and borrowers who were hoping to ‘ride through’ the period of higher rates are now starting to accept a higher for longer environment. This varies globally based on the average loan size, level of swap rates, bank health, degree of innovation in the lending sector and extent to which rates increased but to a greater or lesser degree, assets are likely to come to the market and investment volumes start to unlock, if not back to ‘normal’ levels before the end of the year. So, while we don’t predict a return to normal, we do expect an increase in activity relative to H2.