Market volatility likely to spill over into higher real estate margins

Liquidity in real estate finance markets has tightening in the early weeks of the New Year, as banks react to renewed Chinese equity market volatility with caution.

Events in world equity, fixed income and commodity markets in recent weeks have far reaching consequences for the health of the European economy while the scale of the impact on real estate market is still unclear.

The New Year has delivered new challenges and additional uncertainty.

“At the very least, higher medium term funding costs look to be the likely consequence of this market uncertainty, and higher funding costs could spill into the real estate sector,” writes Starwood Capital in its quarterly market commentary for Starwood European Real Estate Finance Limited (SWEF).

As global markets continue to rebalance risk and yield, the effects are likely to be uneven.

As Starwood writes: “A slowdown in China might well impact European economies and real estate markets but it remains unclear by how much.

“Chinese investors have been prolific real estate investors in recent times, some state related entities may now look to re-orientate capital back domestically whilst others may look to deploy further capital in perceived safe havens such as London, New York, Munich and Paris.”

The banking sector is in modest retrenchment with continued moves towards Basel III compliance by 2019, continues Starwood, while the continued presence of significant NPL and sub performing debt weighing down many institutions.

“Even if healthy, many banks have hit general real estate lending limits, have no access to CMBS, see syndication as harder and all coupled with a general overall “risk off” mentality. We do observe a tightening of loan provision.”

Starwood suggests that, with an appropriately cautious investment approach, it remains vigilant to capitalise on opportunities which current market volatility throws up.

“It may be that these recent weeks will strengthen the ability to source good risk-adjusted London deals in addition to [the fund’s] wider geography.

Liquidity in real estate equity markets continues to benefit from the current macro backdrop.

Capital will likely continue to pour into real estate at a record pace in 2016, predicts LaSalle Investment Management in its Investment Strategy Annual.

As a result of the triple-low market – low economic growth, inflation, and interest rates – capital values are rising to new highs, argues LaSalle, as record low bond yields continue to position commercial real estate as attractive on a relative value basis.

“Fully-leased properties held by listed companies and in private funds can usually be sold at levels well above their most recent valuation, allowing for an extra lift.

“At the same time, returns on new core investments will be hard-pressed to match recent stellar performance. High levels of [equity market] liquidity in both the public and private markets have pushed up prices to levels where investors with fresh capital will have to accept low returns by historic standards.

“Yet, even these lower returns will be sufficient to attract capital to real estate due to similarly low expected returns from other asset classes.”

 

Source: CoStar Finance