Global real estate faces a period of credit tightening

The global real estate sector faces a prolonged period of tightening credit conditions. Banks and other lenders are adopting tighter financial controls, which will make it more difficult to raise and recover capital value, according to M&G Global Real Estate's half-yearly report.

According to the company, the groups most affected will be those with significant exposure to weaker or riskier assets, as well as over-leveraged investors, who already face refinancing risks.

However, it is also noted that there has been a relative absence of risky lending in recent years, which has left the banking sector in a much better position compared to the global financial crisis. This ensures underlying systemic financial soundness and prevents more widespread contagion.

Other key findings include the following:

1. In the US, persistent and disproportionate lending by mid-sized banks to homeowners and developers is putting significant stress on the banking sector. Nearly 30% of total lending by US regional banks is to the commercial real estate sector, in contrast to just over 5% in the UK and the EU as a whole. Risk factors vary considerably from market to market. In the eurozone, the implementation of stricter and more widespread regulatory thresholds is helping to contain the risk of bank collapse and ensure that credit opportunities are not reduced.
2. In general, central banks are focusing more on maintaining financial stability than on controlling inflation, which limits interest rate increases and reduces the threat of much higher rates.
3. Given the higher degree of risk aversion, both lenders and investors are becoming cautious about new investments and are seeking higher compensation for taking on greater risk.

Key issues and opportunities for specific global markets include the following:

1. UK real estate appears to have led the global price decline, with prices adjusting much more sharply than in other global markets. Cautious optimism is being generated, especially in the industrial sector and in some areas of retail, while the residential market (which continues to experience a shortage of rental properties) remains attractive. Non-strategic offices and assets that do not meet increasingly stringent environmental standards will continue to face pressures.
2. Compared to the UK, the Eurozone is one or two quarters behind in terms of price adjustment. Compared to the US, office vacancy rates are much lower, especially in the main business districts, where new supply is limited, which also reduces downside risks.
3. In the US, rising interest rates have already had an impact on venture capital activity, which, combined with the relatively slow "back to the office" trend after the pandemic, has had significant implications for the office sector from New York to San Francisco. In particular, large technology companies have reduced demand in response to perceived more subdued growth prospects.
4. In Asia, while commercial real estate remains largely resilient, there are some markets where rising interest rates and tighter credit conditions are putting upward pressure on yields, particularly in South Korea's logistics sector and Australia's office market. Australian developers are likely to recycle capital from non-strategic assets rather than seek new equity or debt financing. In South Korea, a glut of logistics development is expected over the next 18 months, doubling the current supply, which will put pressure on those unable to let their space and could lead to the sale of assets at lower prices.

José Pellicer, Global Head of Investment Strategy at M&G Real Estate, commented: "Global real estate markets are rebalancing, but the danger is not yet over. The good news is that we are not facing another global financial crisis; banks are now much better prepared for long periods of turbulence and uncertainty. But we should not forget that structural changes such as hybrid work and the growing importance of ESG factors mean that some non-prime assets may not survive.

Federico Bros, head of investment and asset management for Iberia at M&G Real Estate, concluded: "Both inflation and interest rates are factors to consider when approaching the local real estate market in the coming months. Selecting quality assets that are strategically located and have good ESG credentials are some of the key elements. Economic fundamentals mean that Spain remains an attractive market for institutional investors in the real estate sector and M&G Real Estate will be particularly alert to opportunities in the logistics and living sectors. Both have historically demonstrated their strength and resilience regardless of the different economic environments we have faced. Translated with www.DeepL.com/Translator (free version)