In its global real estate outlook for 2023, Savills World Research team says that capital value increases in most real estate sectors around the world in 2023 will be minimal, and rental growth prospects limited, but investment activity should rebound in H2.
In an update to Impacts, its global research programme, the international real estate advisor says that it expects investment activity to rebound in the second half of 2023, as the economic outlook improves, and to normalise in line with long-term average levels; the amount of ‘dry powder’ available for real estate investment at the end of 2022 was US$828 billion, down year-on-year, but still more than 80% up on 2019 / pre-Covid-19 levels.
To counteract low capital value and subdued rental growth, Savills says investors will focus on core picks and value-add strategies (retrofitting, repurposing, focus on gaps of supply). It therefore predicts:
• Prime offices in prime CBD locations in core markets (London, Paris, Berlin, Tokyo, Singapore, Sydney) with low vacancy rates, will retain their attractiveness for core/core plus strategies. Occupiers are seeking energy efficient, well designed office accommodation globally, and green certified offices remain in low supply. Prime rents may edge upwards in several key markets, a combination of inflationary pressures and limited availability of Grade A stock.
• Prime logistics in key trade hubs and countries with rising e-commerce penetration rates will remain in the top of investor strategies. Logistics vacancy rates are at historically low levels in the UK, Germany, Netherlands, France, Spain, US, and speculative development is set to decline. Although occupier demand will soften from Covid-19 highs, low availability and upwards pressure on rents should be sustained.
• Prime multifamily housing is one of the few asset classes where landlords can regularly rebase rents to capture growth, with new-built properties in some markets also exempt from rent regulations. Structural shortages and relatively low levels of new residential construction in large cities in the US, Japan, Germany, Australia, UK, Nordics, Spain and France will drive income returns, although affordability is increasingly becoming a political issue.
• Value-add strategies including retrofitting older office buildings to green standards and repositioning assets with high vacancy rates into alternative uses, including life sciences, residential and hotels, will continue to be at the forefront in 2023, however, high construction and renovation costs will remain a major headwind to investors seeking yield.
• Rising interest rates, causing pricing corrections, are likely to trigger some distressed sales, although to a lesser extent than in the GFC as leverage levels are lower. Opportunistic investors are likely to take advantage of assets with long-term value through active asset management and repositioning, especially repurposing retail and offices in secondary locations in major cities (US, UK, Australia), into residential, hotels, life sciences, last-mile logistics or mixed uses.
• Structural change, including technological innovation, climate change risks and demographics, remain compelling for certain alternative assets types. Savills top pics include data centres and life sciences in the US, UK, Europe, India, China, and Australia, living sectors in the US, UK, Europe, Japan and Australia and renewables infrastructure across all geographies.
Rasheed Hassan, Head of Savills Global Cross Border Investment, comments: “The reality is that as we start 2023 a huge amount of capital is still waiting to deploy into real estate around the world. While in this market buyers are more cautious and potentially need to explore more asset specific business plans, in the absence of generous levered cash on cash returns and rental growth, the long-term prospects for property as an asset class remain strong. The current opportunity to acquire prime assets, across sectors, at somewhat discounted pricing is compelling for many investors.”
Eri Mitsostergiou, Director in the World Research team, adds: “Most labour markets continue to defy pessimism, and thus the real estate occupational markets generally remain robust, especially for prime commercial assets in key global markets. The slowdown in construction activity, due to rising costs and supply chain disruptions, will keep demand and supply in balance across most prime market segments, thereby supporting long-term investor activity.”