• Continuing areas of uncertainty are ongoing high inflation and increases in interest rates, lack of debt and equity capital and refinancing of existing assets.
• With still too many moving parts and an unclear outlook, market liquidity is very low.
• Debt finance is scarce for new and re-development which, with high inflation and construction costs, risks progress with the ESG agenda and repurposing of existing buildings
• The office market is entering a period of disruption described by some as similar to that experienced by retail.

Emerging Trends in Real Estate^® Global Outlook 2023 sets out global real estate sector leaders’ expectations for the year ahead. The report from the Urban Land Institute (ULI) and PwC is a key indicator of sentiment in global real estate and investment and development trends across the globe.

According to global industry leaders, the economic outlook for real estate contains major areas of uncertainty driven by ongoing increases in interest rates and lack of debt and equity capital available, resulting in low liquidity, concerns about refinancing of existing loans and a ‘wait and see’ mode across the industry. A key question is whether rental growth can be delivered against a background of stagnant economies, declining consumer sentiment, ongoing structural change and increasing capex requirements.

The biggest obstacle to getting deals done in 2023 is uncertainty over where and when interest rates will settle, following which more clarity will appear on real estate pricing. With the general expectation that interest rates will stay higher for longer, the current price discovery challenge – amounting for some to a “phoney war” between buyers and sellers – is exacerbated by low investment volumes and low liquidity. Logistics seems to have largely re-priced in major markets and hope that long-standing structural changes have now been priced in for retail is increasing.

Although real estate deals in Asia have long been funded mainly by bank lending, non-bank finance is now catching on, although it still lags markets in the West, where it has become integral to a functioning investment market and increasing liquidity. However, with banks in “wait and see” mode, it remains to be seen whether non-bank lenders will seize opportunities and plug the funding gap. Finance is scarce for new and re-development, where high construction costs, labour shortages and uncertain occupier demand add too much risk for most banks. As existing loans are refinanced, distress on the scale of the global financial crisis is not expected, but many investors will feel the pain. At the same time, there is a huge need for repurposing and accelerating the ESG agenda, not the least to maintain buildings and earn rental income, and this puts the industry in a tough position, as it may no longer be possible to postpone upgrades and capex investments.

This challenge is especially prevalent for offices and there is a strong sense that the sector will experience similar disruption to retail. Most industry leaders are working on the assumption that office occupancy will trend downwards and they share a strong belief in “bifurcation” between prime and secondary, ESG compliant and non-compliant. At the same time, Asian workforces remain predominantly office-oriented, so the impact of the work-from-home wave is less threatening to asset valuations that in the West.

Retail itself is showing encouraging signs of life. Investment managers note strong operational performance in their retail portfolios in the US and Europe, and not just in the relatively resilient sub-sectors like convenience, grocery and retail parks. Asia Pacific retail assets, meanwhile have now probably bottomed, providing opportunities for bottom-fishers to pick up well-located facilities.  Meanwhile, the logistics sector seems to be emerging from the current market malaise stronger than ever with re-pricing in some markets reinforcing the sector’s appeal.

Housing in many Asia Pacific markets has long been some of the least affordable in the world, and although rising interest rates have cooled residential price growth in some markets, they have also made property even less affordable than it was. Continuing the trend seen in the last couple of years, investors are increasingly interested in different types of residential, from both an attractive risk/return and social impact perspective. As a result, current market circumstances support a focus on more defensive property types with more reliable recurrent income, especially  build-to-rent accommodation in Japan, China, and Australia..

“Investors and developers are hesitant in the current uncertain economic climate. But waiting to act until the market turns back in their favour will cause them to miss out on opportunities,” says David Faulkner, president, of ULI Asia. “Repurposing assets and becoming ESG compliant will be key for future success, but a “wait and see” approach may not work for the industry. Postponing upgrades and capex investments might not be possible in the near future if lenders start to deem assets as too risky in today’s finance-scarce environment.”

Gareth Lewis, ETRE Leader, Director at PwC, said: “Redemption requests from open-ended funds point to doubts around current private property valuations, reflecting a disconnect between the public markets and private real estate. The slow speed with which real estate is revalued relative to equities and bonds is causing a serious problem for institutional investors, especially in the US, Europe and Australia. This denominator effect is taking some institutions very close to their cap on real estate holdings and could impact an important source of investment for the sector.”

The full report is available on ULI Knowledge Finder here.

About the Urban Land Institute

• The Urban Land Institute is a non-profit education and research institute supported by its members. Its mission is to shape the future of the built environment for transformative impact in communities worldwide. Established in 1936, the institute has over 48,000 members worldwide representing all aspects of land use and development disciplines.
• ULI’s mission priorities that the organisation will be focusing on over the next three years include:
  • decarbonising the real estate sector and targeting net zero;
  • educating the next generation of diverse real estate leaders; and,
  • increasing housing attainability in communities around the world.

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.