Liquidity crisis and price adjustments, what's the current state of real estate markets?

Todo cambio de ciclo, sea cual sea su causa, sigue un patrón bastante similar que puede desglosarse en cuatro fases.

La primera (fase 1) se caracteriza por el agotamiento de la liquidez, lo que refleja el desacuerdo respecto a los precios de los activos entre compradores y vendedores, a la luz de un cambio de paradigma (en este caso, la subida de los tipos de interés). A continuación, se produce una caída efectiva de los precios (fase 2) hasta que se alcanza un nuevo punto de equilibrio que permite el retorno de los compradores (fase 3) y, a continuación, el inicio de un nuevo ciclo alcista (fase 4). En función de la naturaleza del medio utilizado para invertir en bienes inmuebles, los ajustes serán más o menos rápidos. Lógicamente, cuanto mayor sea la liquidez, antes se producirá el ajuste. De este modo, las sociedades de inversión inmobiliaria cotizadas en bolsa fueron las primeras en ser castigadas por los mercados en 2022, con una importante caída del sector (-37,57 %⁽¹⁾) La liquidez en los mercados inmobiliarios no se agotó hasta el segundo semestre de 2022, mientras que las sociedades de inversión inmobiliaria (SCPI, por sus siglas en francés) registraron un ajuste de sus ingresos entre 6 meses y 1 año después del inicio de la crisis, en el primer semestre de 2023.

An analysis of the two previous major real estate crises (in 1990 and 2008) shows that, on average, property companies begin their correction, and then rebound, one or two half-years before real estate markets do. In other words, if we assume that the real estate markets will bottom out in 2024, listed property companies should be close to a rally.

Sources : Epra, Immostat, BNP Real Estate, IEIF, Rothschild & Co Asset Management, november 2023.

2024: the year that real estate bottoms out?

The average increase of yields by 100 to 150 basis points since the start of monetary tightening(3) was not enough to restore the complete risk premium of the previous decade. However, that was in an inflation-free world. The additional return that buyers can target, if rates do not decline (under a “higher-for longer” scenario) would therefore come from the inflation captured in rents:

So much of the adjustment to yields has already occurred, and the resiliency of rental markets (depending on the types of assets and location) has made it possible to limit the overall impact on the decline of market values. These have corrected since the market peak on average by -10% to -20%(4). Real estate brokers are thus expecting the decline to slow and to truly bottom out next year. The still significant discount on property companies (above 40%(4)) has provided additional room for depreciation, except in the case of logistics, where valuations are skewed by major development projects:

Source: Rothschild & Co Asset Management, CBRE, JLL, Companies - November 2023.
(1) Average adjustment of premium asset values between H2 2019 and H1 2023

17 consecutive months of extreme discount: a new record!

Listed real estate has been trading at extreme discounts (of between 40% and 45%) since June 2022⁽⁴⁾. This is the first time since the 1990s that we have experienced such a long phase of devaluation without a significant uptick. The constant postponement of the pivot (i.e., the end of monetary tightening) and the US regional banking crisis are why investors have waited so long to return to listed real estate. Property allocations in institutional portfolios are at a low⁽⁵⁾. Has the sector gotten through the worst of it? In light of the above, there is reason to hope that this is so, barring a new crisis that might have (indirect) repercussions on property financing. In a less pessimistic scenario, the long maturity of companies' liabilities (6 years on average), the available liquidity and the above-average quality of assets have enabled disposal programmes to continue in the current context (Unibail-Rodamco-Westfield has completed 90% of its €4 billion European disposal plan initiated in 2021, Covivio has sold €718 million since the start of the year, with a target of €1.5 billion by the end of 2024, Gecina €1.1 billion, etc.⁽⁶⁾) continue to provide strong security.

Has the sector gotten through the worst of it?

In light of the above, there is reason to hope that this is so, barring a new crisis that might have (indirect) repercussions on property financing. In a less pessimistic scenario, the long maturity of companies' liabilities (6 years on average), the available liquidity and the above-average quality of assets have enabled disposal programmes to continue in the current context (Unibail-Rodamco-Westfield has completed 90% of its €4 billion European disposal plan initiated in 2021, Covivio has sold €718 million since the start of the year, with a target of €1.5 billion by the end of 2024, Gecina €1.1 billion, etc.⁽⁶⁾) continue to provide strong security.

Completed writing on 7 November 2023

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