Real estate markets in the UK and US are likely to experience double-digit price corrections next year as the cost of debt rises, according to Oxford Economics.
The consultancy expects real estate values to decline by 6% on average globally, but the markets hit hardest will be in advanced Western economies and in the industrial and residential sectors.
In a research briefing, the firm forecast all-property capital declines in 2023 to reach 13.3% in the UK, 12% in the US and 8% in Canada. Markets like Japan, Poland and Singapore stand to be less affected, falling by 3.4%, 4.2% and 5.7%, respectively.
Pricing corrections are expected to be largest in industrial and residential sectors, where net-operating-income (NOI) yields have fallen to record lows in recent years, it said.
The correction will drag on total returns, with Oxford Economics predicting an average global all-property return of 1.4% per annum in 2022 and 2023 – down from 5.6% just three months ago.
Oxford Economics said next year’s global price correction would not be as severe as the 17.8% drop that followed the global financial crisis (GFC) over a decade ago, but would be greater than the 2.2% fall in 2020.
Pricing of listed real estate investment trusts (REITs), meanwhile, imply the correction will be much greater, and more comparable to the aftermath of the GFC. But Oxford Economics said this discrepancy could be “explained particularly by the volatility currently being seen in both the REIT and wider equities market”.
The report said: “Global REIT implied yields currently suggest a GFC-level downturn, which is inconsistent with both our baseline macroeconomic and direct real estate market forecast.”
Oxford Economics also said commercial real estate markets were in a better position today relative to the lead-up to the GFC. “Since the GFC, lending has been more conservative, speculative development down, and headline vacancy rates lower,” it said.
“Still, there are risks. The office and retail sectors both face structural headwinds, as fundamental shifts in occupier demand (such as the future of work and e-commerce) continue to add uncertainty. Meanwhile, more stringent climate regulation is adding to capital expenditure requirements at a time when construction and financing costs are rising fast.”
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