Macroeconomic headwinds slow down capital flows

There has been a sharp slowdown in capital flows as macroeconomic headwinds hit real estate and the property yield gap has largely disappeared, but the value correction is offering opportunities to investors with cash availability and a clear strategy, experts agreed at Real Asset Media’s recent Capital Flows briefing.

Tom Leahy, Head of EMEA Real Estate Research, MSCI

“The world has changed in the last nine months and we’re no longer floating on a sea of cheap money,” said Tom Leahy, head of EMEA real estate research, MSCI. “There is less confidence about allocating capital to European real estate because of the headwinds the market is facing, and the latest quarterly data are showing that deal making has started to moderate. A slowing market and higher costs of capital are putting pressure on yields.”

Around 50 to 100 basis points have been added to yields since last year and the lower levels of capital growth are feeding into total returns, which are being driven down. The trend is similar across property types.

“There’s a certain nervousness coming through,” said Ryan Broomfield, partner, RSM. “We haven’t seen a slowdown in transactions yet, but we expect to see it in the next few months.”

There will be an impact on volumes, as investors are sitting on their hands and sellers are reluctant to put their assets on the market in the current environment.

A thick wrapper of caution

“The sentiment around real estate is still positive but now there’s a thick wrapper of caution,” said Stephen Miles, head of strategic capital partnerships Europe, Schroders Capital. “Everyone expects pricing to shift and bidding on any sale is reflecting the fact that market sentiment is changing.”

Kathrin Jung, Team Leader Portfolio Management, Universal

The slowdown is a reaction to current uncertainty and not a reflection of real estate’s prospects or value as an investment.

“Our investor survey shows that 9 out of 10 want to maintain their exposure to real estate or even increase it,” said Kathrin Jung, team leader portfolio management, Universal Investment Gesellschaft. “But people are differentiating more between assets and between countries. Germany and Europe are losing their dominance as investors focus on stability, the size of the market, transparency and liquidity.”

In this context experts believe significant pricing pressures will come through, up to 15-20% of capital values. Prime real estate is expected to hold its value better, while the prices of secondary assets will be severely impacted.

“The market will slow down and there will be a transitioning of capital, with Asian and Middle Eastern money, private investors and family offices seizing the opportunity to buy assets that people will be forced to sell and taking advantage of currency weakness over here,” said Nick Axford, chief economist, Avison Young.