Declines in real estate capital values caused by aggressive interest rate hikes will continue until at the least the summer of next year, UBS has warned.
In its outlook for European real estate, the Swiss financial services firm said investors ready to deploy capital now should hold off from doing so “for a few months” because property prices do not yet fully reflect higher interest rates.
UBS is predicting that capital values across the globe will bottom out in the second half of 2023, basing its assessment on data from the global financial crisis, which shows that capital values troughed in the fourth quarter of 2009, three quarters after the bottoming-out of global GDP and listed real estate prices.
“We expect modest declines in GDP in the first half of 2023 before growth resumes,” the company said, but it added that a longer adjustment was possible depending on how the economy performed.
UBS is also predicting that attractive buying opportunities will be generated by property owners being forced to accept below-market prices because difficulties in refinancing debt have prompted sales. However, the company added it does not expect large amounts of distress.
The firm considers assets within the life sciences, student accommodation, cold storage logistics and self-storage sectors to be defensive in the coming months, advising that strong structural drivers that support rental growth will provide the greatest value protection.
It added that low yielding assets with potential for income growth will be well placed to withstand some of the value depreciation from rising rates.
UBS explained: “Risk should define the yield. This means that assets with a higher risk profile will need to adjust to an even higher yield to maintain a risk premium over more core assets. And second, in a period of high inflation, the value of the income of an asset will erode unless it can generate rental growth.”