Opportunistic capital starting to emerge ahead of rate peak

The rapid rise in interest rates caused significant pricing uncertainty for real estate and this has caused the substantial slowdown in the property market in H1 2023, explained Tom Leahy, head of EMEA real assets research at MSCI.

“We’ve had an extended period of very low interest rates and that pushed a lot of capital into global real estate. But obviously with the spike in inflation post covid, that situation is completely reversed and that’s caused lots of pricing uncertainty,” Leahy said in an interview with Real Asset Insight.

Initially the pricing uncertainty manifested itself in very low deal volumes and MSCI’s liquidity analysis showed price expectations between buyers and sellers have moved a long way apart. “Without that agreement on where pricing is in the market you see a dramatic fall in transaction volumes and that’s really where we are at the moment.”

The outlook depends on the actions of central bankers, Leahy explained. “Central bankers were the architects of the last property boom as they kept interest rates exceptionally low for an extended period of time,” Leahy said. “I think when the rate cycle does peak and we’re at the terminal rate, that will provide some certainty to investors and some certainty around the trajectory of interest rates and where pricing should be in the real estate market.”

That would allow the deals market to open up again.

“I’m not sure we can expect that in Q1 of next year, I think it’s going to be maybe six to 12 months before we see the transaction market really open up,” he said.

“We are seeing a little bit of a rebound in parts of the market where we’ve seen the most rapid correction. Parts of the industrial sector across Europe where they’ve had a rapid repricing and rents are still growing, that’s pulling capital back into the market,” he added. “But there are other sectors where the deal volume is still very low.”

Leahy said it is clearly difficult for many investors to do deals at the moment and that is illustrated by the low transaction volumes.

However, some of the major US institutional investment managers have already raised significant amounts of capital in readiness for opportunistic investment.

“Some sovereign wealth capital as well is coming from the Middle East and the Asia Pacific region,” he said.

He said there is also some private wealth capital emerging and capital from Japan. “The Bank of Japan has not increased interest rates in the same way that we’ve seen across many other developed economies, so we’re seeing some capital coming out of Japan and being deployed in global markets at a level we haven’t seen before.”