2022 has been extraordinary in every respect, writes Christopher Mertlitz, head of European investments at WP Carey.
Amidst a painful human toll, the ongoing war in Ukraine has resulted in material shocks to economic and financial markets, the consequences of which we are all still reeling from as we contend with inflation, rising interest rates, high energy costs and the impending prospect of a European recession.
While transaction volumes remained relatively unaffected during the first nine months of the year, the changing capital markets conditions have filtered their way through the European real estate sector.
This has dramatically shifted investor sentiment and appetite to transact, with many market participants choosing a 'wait-and-see' approach as they contend with an ever-changing capital markets backdrop.
Positive take
Yet, amidst a clouded forecast, it’s not all doom and gloom. We are seeing inflation began to cool and investors are shifting their focus to where interest rates may peak in 2023.
The market has also transitioned to accommodate price adjustments, with the gap between buyer and seller expectations we saw earlier this year closing.
For investors looking to remain active, there remain pockets of opportunity within sectors such as industrial, grocery and other select retail, all of which continue to demonstrate impressive resilience.
Opportunities within less traditional sectors of real estate also remain available for investors willing to do the due diligence. For example, WP Carey acquired a portfolio of 26 mission-critical crematoriums in Spain earlier this year.
With borrowing costs having increased, we expect more companies will be looking to conduct sale-leasebacks, unlocking value in otherwise illiquid real estate assets to reinvest proceeds back into their business and fund key growth objectives. We have done several such transactions this year with a total investment volume of $1.3 bn during the first nine months of 2022.
As more companies look to raise capital and seek bespoke financing, several will increasingly utilise their real estate to generate more liquidity.
2023 Outlook
In 2023, we expect further downward pressure on real estate prices and upward pressure on initial yields in Europe and the US. We also expect central banks to continue hiking interest rates early in the year, though in smaller increments compared to 2022.
Still, that will have an impact on valuations for property investments and will impact overall transaction volume. However, there is still opportunity for investors, particularly all-equity buyers sitting on well-priced capital, to find attractive investments in 2023.
Those that will be most successful will remain diligent in their underwriting and focus on properties that are critical to the operations of their tenants.
