After a volatile year of intense geopolitical tensions, economic shocks and uneven monetary policy, Colliers forecasts in its latest Global Investor Outlook 2023 that the stabilisation process in the global real estate market will take hold by mid-2023. Although some countries such as the UK and the US have already witnessed a rapid price adjustment, this has not been universal. Investors anticipate large differences in how the readjustment will unfold across sectors and markets in the coming year.
"Real estate markets are a solid investment and long-term source of income once price levels recover. Local developments and macroeconomic factors may yet destabilise that recovery. Investors should be alert to these risks, especially in markets that are susceptible to further disruption," said Tony Horrell, head of Global Capital Markets at Colliers. "We expect investment activity to pick up as central banks end rate hikes and greater economic certainty emerges. In the meantime, investors will continue to hunt for opportunities, with significant funds available."
EMEA Investor Concerns
The cost of debt is one of the main concerns of international investors. 78% say it will negatively affect their real estate strategy in 2023. A further 63% believe that the reduced availability of financing will have a negative impact. These responses are in line with those in other regions of the world: APAC and the Americas.
In terms of broader macroeconomic factors, in EMEA 78% of investors highlighted concerns about energy costs and supply. Other key risks in the region were rising geopolitical tension, selected by 72% of respondents, and currency fluctuations (61%).
Liquidity and sustainability drive opportunities
Asset values will continue to be negatively affected by the transition to higher interest rates, with a particular impact in 2023 on non-strategic assets. Capital raising for opportunistic funds is accelerating, indicating an opportunity-seeking approach to the current adjustment:
- Closed-end real estate funds reaching their maturity date.
- Alternative financing solutions, mezzanine, bridge loans and project finance.
- Listed funds, such as REITS, estates and developers that continue to trade at discounts to net asset value, providing opportunities to acquire bonds and convert them to equity, place equity in existing structures or, in some cases, delist.
Luke Dawson, Managing Director of Crossborder Capital Markets at Colliers EMEA, explains these opportunities in the European real estate sector: "Discounts to net asset value in the listed sector remain high, and we will see private equity and similar investors take advantage of this arbitrage. We will see deals where investors acquire a controlling stake in REITs or similar companies and subsequently delist them".
ESG criteria a central factor in investment selection
Environmental, social and governance (ESG) criteria remain a key factor in investor decision-making. In Colliers' previous Global Investor Outlook 2022 report, only 10% of investors surveyed had an investment strategy that incorporated ESG criteria. This has now risen to 17%, and 45% of respondents expect to divest up to 20% of their current portfolio that does not meet ESG criteria in the next five years.
"In response to occupier preferences, increasing regulatory requirements and rising asset operating costs, investors this year are rethinking value and placing greater emphasis on a range of ESG factors. There is an expectation, and increasing evidence, that assets with strong sustainability factors can command a premium and those that don't will be heavily devalued," comments Damian Harrington, Research Director, Global Capital Markets EMEA. "It will be interesting to see how capital is distributed in terms of refinancing, asset upgrades, new builds or divestments."
Core assets prevail
Market volatility has led investors to focus on fundamentals and defensive strategies. Across the three regions, the three sectors preferred by investors in 2023 are office (60%), industrial and logistics (60%) and multifamily/BTR (48%). In EMEA, offices were the asset of choice for investors. While Core assets in EMEA's largest and most consolidated cities are preferred by investors (55%), only 7% said that Tier 2 and 3 cities would be their first choice. However, 39% of respondents said they would build their portfolios with a mix of Tier 1, 2 and 3 locations, which will offer opportunities in many European secondary markets.
Rising costs and future challenges
Investors surveyed cited interest rates (88%), inflation (74%) and supply chain disruption (68%) as their top macroeconomic challenges for the coming year. In addition, inflation and current interest rates are driving up operating and construction costs, already exacerbated by supply chain problems and energy price rises. Globally, 85% of investors said that rising construction costs would have the most negative influence on their ability to carry out their investment strategies, followed by rising asset operating costs (77%).
"Understanding and managing the multitude of upward cost pressures affecting the real estate sector is critical. The cost of capital is only part of the equation," said Chris Pilgrim, Head of Global Capital Markets. "Expert advisors with local knowledge can help investors understand the nuances of each market that impact costs and asset values."
