With interest rates set to remain elevated in the medium term, investors who are able to pay for acquisitions in cash will be at a significant advantage, according to Christopher Mertlitz, head of European investments at leaseback specialist WP Carey.
Commenting on the outlook for real estate ahead of Expo Real, Mertlitz said that monetary policy decisions on both sides of the Atlantic would be a key factor shaping the future direction of the market.
But despite recent interest rate cuts by the European Central Bank (ECB) – and further cuts likely to follow - the financing environment is expected to remain challenging for many companies in the medium term, he noted.
‘We believe the more important factor to focus on is long-term borrowing costs,’ he said. As real estate investors typically borrow on a 5- or 7-year fixed rate basis, the ECB’s short term deposit rate cuts will not have as significant an impact on the real estate market as some might expect, he pointed out.
‘In this continued high interest rate environment, all-equity buyers like us will have an advantage as we are not reliant on debt capital.’
A key talking point at this year’s Expo will be the current state of the investment market, said Mertlitz. ‘Corrections in valuations in some European real estate markets are resulting in the narrowing of bid-ask spreads between buyers and sellers, which should help accelerate transaction activity. However, in some individual markets and asset classes we continue to see stagnation—especially where yields were at their lowest before the interest rate hike cycle began.’
In an environment where high financing costs remain a pressing issue, sale-leasebacks will continue to be an attractive option for companies to unlock immediate capital from otherwise illiquid assets, he added.
‘Companies can utilise this capital to fund their ongoing operations, invest in their future expansion, or for research and development,’ he said.
Earlier this year, WP Carey completed the €280 mln sale-leaseback of 16 industrial facilities located in Italy, Spain and Germany net leased to Fedrigoni Group, a global manufacturer of specialty papers.
Mertlitz said private equity firms in Europe and the US also continued to show interest in sale-leaseback solutions as a means of financing new acquisitions or bolstering the growth of portfolio companies. ‘Last year alone, around 75% of our investment volume was attributable to transactions with PE-backed companies,’ he said.
Asked which property sectors currently look promising, Mertlitz said: ‘At this moment, we see attractive opportunities in industrials, and more specifically within the logistics and manufacturing sub-sectors, due to strong market fundamentals. The e-commerce boom and the logistics sector’s key role in European supply chains remain long-term growth drivers while the emerging trend towards nearshoring should provide both manufacturing and logistics with further growth impetus.’
He added: ‘ We also see growth in food retail, self-storage and data centre segments in Europe.’
