Market viewpoint:
Damian Harrington
Director and Head of Research Global Capital Markets and EMEA Colliers
Colliers is a global professional services and investment management company with $98 billion of assets under management, and operations in 65 countries.
Damian Harrington,
Director and Head of Research, Global Capital Markets and EMEA, Colliers
What do you think the coming year holds?
A global pricing reset is underway, driven by the combination of rising interest rates and inflation. We’re still in a period of re-setting in response, but by the second half of this year, most major markets should have re-priced and we’ll start to see momentum returning in terms of investment flows. This process should begin in the larger, more liquid markets before cascading down into secondary markets. This process will play out differently in different regions, and there will be further shock and events that risk arresting momentum before things settle down. The collapse of SVB-bank in the US pre-MIPIM, and the takeover of Credit Suisse by UBS post-MIPIM reflect underlying anxiety across markets. It also illustrates that regulators and markets can react quickly to secure financial stability and protect against systemic shocks. The banking sector is far better capitalised than during the post-global financial crisis era, but this highlights that individual situations can cause ructions and opportunities as the market reset journey continues.
As per our latest Global Investor Outlook report, we expect to see opportunities across the capital stack, with debt strategies looking far more favourable under changing conditions. There will be more recapitalisation and refinance opportunities arise as the ‘new norm’ in finance and pricing conditions crystallise, in addition to triggered disposals via redemption calls on funds. We also anticipate growth in sale and leasebacks as the leveraged loan situation drives corporate decisions on asset disposals.
There will be more recapitalisation and refinance opportunities arise as the ‘new norm’ in finance and pricing conditions crystallise
How are ESG considerations shaping the market?
ESG is a major factor, not just because of regulatory, shareholder and stakeholder pressure in doing what is right for the planet, but more recently because the high cost of energy is hitting occupiers and landlords in the pocket. This has amplified the need for action, with energy efficiency and reduced operational carbon at top of mind when it comes to investors decisions on what to fix. Energy inflation may have peaked, but more fluctuations can’t be ruled out, so investors need a long-term plan for retrofitting assets to improve efficiencies or dispose of assets that no longer fir their criteria. This level of action and decision making has increased markedly in the last six months alone, so there’s likely to be a huge amount of churn and change in the quality and ownership of the asset base over the next 20-30 years – our Global Investor Outlook Report suggests 45% of investors are looking to dispose of 20% of their assets over the next five years alone, as a result of ESG performance criteria.
Turning this desire into reality still requires some big steps to overcome practical stumbling blocks. Part of the issue is the market has only recently shifted focus to measuring energy use, operational and embedded carbon. Many accreditation systems/certificates have simply masked these core determinants of asset quality. Getting consistent measurements is another challenge, given the array of technology deployed in building management systems (BMS), and this needs to be standardised to provide reliable and comparable data, on an ongoing basis – not just as a one-off certificate at the time of asking. Thirdly, there is the agent-principle stumbling block – tenants agreeing to share energy utilisation/use data, so landlords can understand how to improve asset efficiency. Sharing that cost is the next leap of faith, but the most obvious step is to rentalise energy/service charge savings to pay for the capital expenditure required in any retrofit. The challenge is retrofitting assets with this focus is new to markets and data/analysis is thin on the ground. This could slow down the transition short-term, especially with broader market re-pricing challenges afoot. That said, tightening regulations will continue to enforce a shift to higher quality assets, especially in Europe. The UK and the Dutch have been leading on policy impacting real estate directly, with enforced EPC-requirements now in place. The Securities and Exchange Commission (SEC) is pushing for more uniformity from both a US and global perspective. The direction of travel will be towards greater harmonisation.
In the meantime, there are some great tools and services out there to help investors make informed decisions. Colliers offers its own array of ‘Hive’ services, incorporating tools such as CRREM that help illustrate the net-zero stranding risk of assets.
What impact will this have on the landlord/tenant relationship?
Both sides of the equation are being forced to think about change in relation to ESG and sustainability. But taking a short-term approach is not the answer. There’s not enough stock of suitable quality for occupiers to simply seek new premises, so landlords and tenants are going to have to work together to plan for and share the cost of decarbonising assets. Less than 1% of today’s real estate stock is net-zero carbon. Data sharing will be crucial. While green lease structures set out how this should work, the next step is setting out who pays. This is going to be a challenging area to contract for, and disputes will inevitably arise.
What sectors look particularly strong?
Industrial and logistics are still high on the list for investors. Industrial has re-priced fastest and will build momentum ahead of others. Some structural drivers like e-commerce sales have slowed down, but the fundamentals are strong with vacancy at around 4% on average. There are far fewer question marks over forward looking returns, with stable rent forecasts in place across the vast majority of markets.
There’s a rental premium for high-quality, energy-efficient office assets. Values outside of that premium, core asset range are under pressure to decline. Not only are there question marks about yields, and pricing, of less desirable office assets, there are also questions about future utilisation as occupiers continue to grapple with their spatial requirements given the shift to hybrid working.
Multi-family residential property is also up there as a favoured, more defensive sector, though rental growth is under pressure from the cost-of-living crisis and the prospect of rental caps in some countries. Niche areas like life sciences labs and data centres offer opportunity too, though data centres do face issues in terms of their energy consumption given the broader ESG narrative.
And looking even further ahead?
We’re only at the first stage of the recovery journey. There are many structural changes ahead which will take years to work through, and this will deliver shocks and opportunities. The first half of 2023 is going to be characterised by the reset as everyone gets a clearer view on the cost of money and the revaluation of assets. Once that happens, recovery and growth should give the market greater comfort to really kick on.
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