How would you describe the 2022 real estate year?
Disrupted and chaotic – mainly as a result of macro events. The war in Ukraine, supply chain issues, rising energy costs and inflation all led to a markedly changed economic backdrop, the consequences of which were amplified in the UK by the chaos in Downing Street.
Rising bond yields, base rates and financing costs impacted all capital markets and liquidity. Ultimately this impacted pricing in the direct property market. I think most people will be glad 2022 is over!
What are the main challenges facing the sector and your company in 2023?
The main issue is the repricing that’s going on because of a higher interest rate environment. Generally, sentiment has been affected as there will undoubtedly be some causalities from the speed of both the writedowns and rise in financing costs. We need to see the impact before sentiment can improve. How soon will we reach the bottom and when will liquidity fully return?
What are likely to be the chief positive influences on strategy in 2023?
For Picton, there are already a few positives. Our track record in asset management and low level of leverage secured at long-term fixed rates will be helpful as we navigate this period of volatility. Knowing that our cost base is relatively stable is hugely helpful. There will also be opportunities arising from market conditions and as part of our strategy we need to ensure we are best placed to capitalise on these for shareholders.
‘If one of the consequences of this short-term pain is an acceleration in the rate at which the industry addresses climate change and the need for net zero, that’s really positive.’Michael Morris, Picton Property Income
As a listed vehicle, our shares have already re-rated, in line with the wider market, so we are ahead of the curve relative to directly held assets, which makes the investment case far more compelling.
Where do you see the best value and what will be the best strategy in the year ahead?
In recent years, it’s all been about sector calls, but looking forward, we believe returns are likely to converge so stock selection will be key. We believe diversified strategies focusing on bottom up asset selection are likely to outperform. Currently, good occupational demand doesn’t guarantee good capital growth and vice versa. The devil is in the detail.
Looking back at 2022, what has given you the greatest inspiration for this year?
Yet again, we have been operating in challenging circumstances and the team and indeed our underlying occupier businesses have been remarkably resilient, whatever has been thrown at them. This is hugely motivating. Whilst no one likes rising energy costs, we think that this is likely to accelerate the demand for energy-efficient buildings.
If one of the consequences of this short-term pain is an acceleration in the rate at which the industry addresses climate change and the need for net zero, that’s really positive also.