A market is made by buyers and sellers agreeing to an exchange. In real estate, for those of us in the business of facilitating the process, this didn’t happen enough last year. According to MSCI data, the number of completed property transactions globally was the lowest in over a decade. So the question for 2024 is whether we are going to see deal volumes recover? Ultimately, this requires a more active pool of buyers and sellers.

We can be fairly confident of there being more buyers this year. There’s a renewed sense of optimism around the market, underpinned by a shift in the interest rate environment, and conviction in the soft landing. The linchpin of any investment strategy is to buy low, sell high, and if markets are right in their expectations for inflation, growth, and interest rates, the low point could already be behind us.

In any cycle, the greatest returns are made by those who buy closest to the market nadir, so any evidence of a nascent recovery will bring investors quickly in from the cold. And while the environment for fundraising is likely to remain challenging for much of this year, institutions are not turning their backs on real estate, and there is plenty of dry powder to support a recovery in the interim.

There is, however, more uncertainty in the outlook for sellers; if it’s a good time to buy, then in general, it implies that it’s a bad time to sell. According to MSCI data, the number of active sellers in 2023 was as much as 75 per cent down on 2019 levels. Discretionary vendors will look to ride the recovery and avoid crystallising any unrealised losses on their portfolios. But not all landlords will be able to play the long game, or act with discretion, becoming ‘motivated’ sellers.

There are several good reasons to expect more motivated sellers this year. First, there is a significant quantum of debt set to mature in 2024, estimated by the IMF at around US$900 billion globally, and many property owners face the prospect of a higher cost of debt, and lower equity valuation, at refinancing. For some, the cost will be too much to bear, leading to refinancing challenges where the decision to sell is somewhat forced upon existing sponsors. There will also be situations where hard covenants are firmly breached, and assets become ‘distressed.’ Given that most banks are not typically in the loan-to-own business, these distressed assets are likely to go to market for sale.

Second, many open-ended funds are under pressure to sell in order to satisfy growing redemption requests. Some investors are looking to cash-in before private valuations catch up with public-market expectations, while others are simply de-risking portfolios given a shift in the relative returns between real estate and other interest bearing asset classes. This pressure is most acute in Europe when open-ended funds dominate the real estate fund landscape.

Finally, some closed-ended funds will also be motivated to sell. Time limited funds can only hold   assets for so long; those that avoided selling last year may now need to exit their investments and return money to investors.

A new year often brings renewed optimism, especially in the midst of a market down cycle. This year is no different. But there is perhaps more conviction in expectations of a recovery in 2024 than existed at the beginning of last year. In combination, a growing pool of buyers and an increase in motivated sellers will boost liquidity, which will support price discovery and - eventually - price recovery, as competition for assets intensifies.

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Contact Oliver Salmon

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