A deteriorating global economic outlook has increased the risks of a more severe real estate downturn, with residential and logistics markets particularly vulnerable, according to Oxford Economics.
The consultancy has warned that the greatest risk to property returns is a scenario where inflation remains elevated and central banks lose their credibility to control it.
Under a high inflation scenario, “property values are severely hit, falling 12% below our baseline forecast,” it said.
Oxford Economics had already forecast a baseline “interest rate-induced pricing correction”, which would cause global all-property total returns to average 3.4% pa between 2022 and 2024.
But, “as downside risks mount, the possibility of even weaker returns has increased”, it said in an update this week.
The risk of a near-universal global housing market crash has risen sharply, spurred by rising mortgage rates, high valuations, and squeezed real incomes.
Under this scenario, all-property returns would be nearly six percentage points below the firm’s baseline by the end of 2024.
Advanced economies with already exposed housing sectors, such as Canada and the UK, would see returns dented the most.
But Oxford Economics said the scenario of persistently high inflation would cause global all-property returns fall 9.5 percentage points below the baseline by 2024.
Low-yielding sectors, such as industrial and residential, would be hit the hardest; US industrial values could fall nearly 25%, while French and Canadian residential sectors could drop 20% and 18%, respectively.
Under a gas rationing scenario, European returns would be hit more severely than other regions, Oxford Economics predicted, with global all-property returns down 2.6 percentage points from the baseline, but European returns down five percentage points.
An “upside scenario”, based on supply-chain problems ending, envisions all property returns rising nearly two percentage points above the baseline by 2024.
All sectors stand to benefit under this situation, but North America would see the largest gain, as 10-year US Treasuries would experience sharper compression over the near term, boosting capital appreciation.
“Rising economic and monetary policy uncertainty globally has increased the downside risks associated with our near-term forecast and threaten commercial real estate returns,” said Christopher Babatope, associate director at Oxford Economics.
“As it stands, we expect an interest rate-induced pricing correction over the coming quarters, which will dampen returns next year.
“If we experience a housing market crash or the de-anchoring of inflation expectations, we would see a much more severe pricing correction than pencilled into our baseline forecast.
“Our baseline forecast has an indicative probability of 45%, highlighting how precarious the current situation is.”
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