Interest in interest rates: Real estate sector upbeat but waiting on central bank decisions

Having recently attended ExpoReal in Munich, Dewi Habraken reflects on a Real Estate sector that remains positive, despite seeing persistently low levels of deal flow, as the industry continues to wait on positive interest rate movements.

It’s perhaps slightly surprising that, against a backdrop of volatile markets and high interest rates, the European commercial real estate sector should be quite so upbeat and optimistic and yet, they were exactly the prevailing sentiments at this year’s ExpoReal.

Overall, the sector is continuing to see deals happen but they are smaller and highly targeted, with leverage low and capital raising conditions persistently challenging. Inflation and high central bank interest rates are continuing to put downward pressure on real estate transactions, according to Dewi. And with no leverage and difficulties in refinancing, deals are hard to push through.

“The general feeling from investors was that deal frequency is starting to pick up as sellers are biting the bullet in the first half of 2023 but that doesn’t hide the fact that deals were down roughly 60% in the first half of the year,” says Dewi.

“There are some specific areas that are seeing some action with ‘core’ and ‘core +’ assets are still sought after, where assets are fully furnished and fitted and therefore there is guaranteed revenue generation, or where sustainability credentials are high,” explains Dewi. “

There is some movement and potential in the REITS market too, where access is perhaps easier and leverage is not so much of a big issue.”

Big deals are not on the agenda though. The sweet spot is between EUR20m and EUR100m, with higher ticket prices requiring the take-on of debt, which in the current market is expensive and undesirable.

Equally, office space with low sustainability credentials are being heavily discounted.

“Asset holders are having to be realistic,” explains Dewi. “There is a need for liquidity, and in the current market, that means selling off assets – especially in regions where failure corrections and exposure to debt are high. In some cases, it’s meaning that asset holders are having to accept that, to release liquidity and create market movement, they are going to have to think again about downward valuations.”

So why the positivity?

Dewi points to an industry that feels it is on the cusp of seeing market movement, it is just a case of waiting for interest rates to move downwards, which will feel like turning on the taps to release deal flow.

“We need a recalibration and reevaluation in the market,” says Dewi. “There is appetite to do deals, and once conditions improve, it’s likely we will see considerable movement. But for the time being, optimism is largely based on anticipation and potential rather than actual deal flow. With asset re-valuations and the prospect of interest rate changes on the horizon, the hope is that it won’t be too long until things do start to move again.”

The positive is that people are remaining focused and upbeat, and adopting an entrepreneurial attitude when it comes for looking for opportunities.

It is that spirit is keeping the sector buoyant and well poised for when the time comes for bigger ticket deals.

How can JTC help?