summary
After a difficult 2023 for the European real estate sector and an echo chamber of pessimism, it is important to challenge this view with some reasons to be optimistic about 2024 and what it will look like. We believe that this is the case.
weight of capital
dry powder
Piles of dry powder are waiting for valuations to fall. All markets have cycles. There is reason to believe that some investors see opportunity on the other side of the holiday season while others are still recovering from the hangover.
global capital
Global macroeconomic conditions over the past 18-24 months have led to capital accumulation in petrostates such as the UAE and Saudi Arabia, which have historically had strong allocations to prime European real estate. Investors in these jurisdictions (primarily sovereign wealth funds and family offices, but increasingly regional asset managers and PE funds) are often all-cash buyers. With prices bottoming out across European markets, these investors are poised to benefit from the consolidation cycle and continued relative dollar strength. Alder’s recent $291 million acquisition of British developer London Square is a sign of things to come in 2024.
Maturing funds
While fund managers have been granted some forbearance by institutional investors, a more stable and liquid market will allow managers and investors to move forward in achieving that goal. Growth in the real estate secondary market will provide further avenues for liquidity.
The emergence of alternative lenders
While the banking sector faces capacity constraints and declining risk appetite, investors now have a growing choice of alternative providers of increasingly aggressive fixed income and quasi-bond debt, often with loan facilities. Banks are supporting the project through loans. As a result, there will be more competition to fund trading activities.
Macroeconomic considerations
debt maturing
There are a huge number of real estate loans maturing by 2025, including at least the following:
Falling capital values and rising debt costs impact refinance options, creating challenging opportunities for lenders to drive consensual sales and, if necessary, pivot to creative execution strategies. It will be.
we work
WeWork filed for bankruptcy protection in the U.S. in November, paving the way for repossessions and distressed sales around the world and opening up opportunities for competitors and investors.
easing inflation
High inflation has fallen faster than expected on a sustainable basis. There is still some way to go to achieve the central bank’s long-term goals, but the direction is downward.
stable interest rate
Interest rates have peaked. While conventional wisdom holds that interest rates will remain high for an extended period of time, it seems likely that rates will start to fall in 2024, resulting in better trading conditions.
Treasury/gold yield decline
Lower government bond/bond yields will make investing in real estate more attractive, while adjustments in capital values have made real estate yields look increasingly attractive. This combination could potentially result in cap rate compression.
real estate basics
occupational demands
Occupational demand across many sectors remains strong. Even in fields that are less popular, such as offices, the return to office work is continuing, and this is helping to make office work more entrenched.
Increase in rentals
Rent growth for prime assets in many sectors has exceeded expectations. This, combined with higher cap rates due to rising gold yields, will attract investors looking to take on opportunities with higher total returns.
Decline in construction prices
Construction costs fell significantly in the second half of 2023, following the well-documented surge experienced by the construction industry. This was despite the reduced availability of certain materials. The decline in construction prices will finally be reflected in construction costs in 2024.
policy and regulation
environmental regulations
Building owners, operators and occupiers have an obligation to decarbonise. The traditional view is that this will be difficult, labor intensive and expensive to achieve, but the path to net zero is becoming better understood, more affordable and reliable, and there are many ways to achieve it. The commercial benefits of this are becoming more apparent. Some see it as a challenge, others see it as an opportunity.
Reuse and refurbishment
A variety of factors may be increasing or accelerating building obsolescence, including COVID-19, new work patterns, outdated design features, rules and regulations, technology and automation, and more. In some cases, repurposing or renovating to rejuvenate a property is an option. Some offices have already been repositioned for residential or life sciences use.
Political push to develop and promote new infrastructure
Europe faces long-term growth and environmental challenges, and even if there is disagreement over priorities, there is a need for a strategic approach to improving infrastructure (from data to transport) for the future. There is a broad political consensus. Whether this is achieved through deregulation, planned intervention, or public investment, this will provide opportunities for brave investors and developers.
underlying trends
technology
AI is starting to transform the real estate industry by reducing energy usage, reducing a building’s carbon footprint, optimizing operating costs, or speeding up building construction. It may not be a silver bullet, but neither was internet connectivity 30 years ago. AI and technology in general will continue to drive the need for functionally superior and well-located data centers.
Deglobalization: Near and friend shoring
Global hotspots and rising protectionism are causing companies and governments to increasingly rely on nearshoring and friend-shoring to protect their supply chains from future shocks. This trend will continue to impact the real estate sector, particularly prime logistics assets that continue to enjoy high occupancy rates and positive rent growth.
market psychology
evaluation
Increased deal flow generates more data, which provides buyers and sellers with pricing certainty and confidence in their trades, which in turn generates deal flow and creates a virtuous cycle of deals.
markets are cyclical
Most investors forget that markets are cyclical, or lack confidence in their risk appetite, investor support, or being an early adopter, but the real winners are based on the overall mood. Start buying from tired investors at low prices when is still bearish. This could be a bet on general market sentiment, or a bet on general sentiment regarding a particular asset class. As day turns to night, other companies will eventually jump on the bandwagon, resulting in compressed yields, attracting laggards and giving first movers a chance to cash in and achieve higher returns. The lethargy of 2023 is the perfect starting point for dissonance among investors.
Boredom and FOMO
finally…. Twiddling your thumbs? Are you spending too much time scrolling? Investors won’t want to miss out on opportunities as the restructuring cycle accelerates. A combination of boredom and FOMO could lead to increased activity and a robust trading environment in 2024.
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