Four seasons; four quarters; four stories

The narrative of the private real estate market in 2022 changed with the seasons. A year starting with record deals was then impacted by war, inflation and recession, and finished in a deep freeze.

It has not been the easiest of years for the private real estate market, despite a start which held so much promise. Below, PERE chronicles the 12 months just gone by highlighting four of our better-read articles.

Q1: Deals go gangbusters

The looming pressures of geopolitical tensions, supply chain disruptions, uncertainty of a higher inflation and interest rates did not stop private real estate from starting the year in strong form. Global investment grew 34 percent year-on-year in Q1 2022 to $282 billion, according to broker CBRE. In February, the market saw real estate heavyweight Blackstone agreeing on three transactions around the globe totaling roughly $38 billion of activity in just three days of a week, the firm’s highest volume of real estate transactions within such a short period of time in a decade. It executed its €21 billion recapitalization of its European logistics company Mileway; entered into an agreement to purchase the Australian gaming operator Crown Resorts for nearly A$8.9 billion ($6.3 billion; €5.4 billion) and committed to privatize the US REIT Preferred Apartment Communities for $5.8 billion. However, closing a commercial real estate transaction usually takes a prolonged process and a robust Q1 does not necessarily mean momentum would last the year, Real Capital Analytics’ Jim Costello said at the time. How right he was.

Q2: War breaks out

Not but a few days after Blackstone’s record week, the year changed for the worse. By the end of February, Russian president Vladimir Putin had committed his first acts of aggression and by the end of March, full scale war tainted Europe’s far Eastern front. Many were quick to say that effects on the real estate market would come from the macroeconomic environment. That prediction has proved right. Another, namely the notion that the US would see increased demand due to it being a “safe haven” and further removed from the war, also came true. Capital inflows to the US from cross-border capital in the first half of 2022 reached their highest level since the pandemic, highlighted by a 20 percent increase from Europe. The continent, and the global economy writ large, was still processing the ongoing conflict in other ways. Tom Leahy, head of EMEA real estate research at MSCI, said at the time: “The longer the conflict drags on, the worse the effects will be, not just on neighboring economies but for stability in Europe in general.”

Q3: Bracing for a correction

By the time approximately 40,000 visitors descended on Munich’s famous Messe Munchen exhibition halls for the year’s EXPO Real conference in October, macroeconomic conditions had materially worsened, and institutional private real estate organizations were taking evasive action to avoid the most punishing of consequences. Inflation levels of 10 percent or higher across major economies precipitated interest rate surges; fears of recessionary impacts on real estate escalated, bringing investment activity screeching to a halt. On a panel at the event, chaired by PERE, Alex Jeffrey, chief executive at London-based manager Savills Investment Management, said: “People are worried: the environment, war, inflation, interest rates, economic sentiment generally. They worry about the number of things that could go wrong and the impact that could have on property prices and the security of their income.”

Determining the duration of spiking interest rates would become critical for when deploying leverage on new deals or refinancing existing outlays. Said Timothy Horrocks, head of investment, continental Europe at manager Nuveen Real Estate: “Everything was financed at 100 basis points, all-in. Suddenly, debt is four times more expensive. That has a knock-on effect on pricing.”

Q4: The big chill

As the year drew to a close, a freeze had set into many parts of the private real estate market, resulting from the deadlock between buyers and sellers over pricing. However, some property owners are under increasing pressure to sell assets during this period of uncertainty. With borrowers facing looming loan maturities and soaring debt costs from rising interest rates, leverage issues are unsurprisingly a major driver of selling activity. However, an anticipated repricing in private real estate – given the current disconnect between public REITs and private market values – has also been a significant factor behind property owners now seeking to sell. In PERE’s final cover story of the year, Ben Sanderson, managing director of real estate at Aviva Investors, the global asset management business of UK insurer Aviva, noted: “I think the more forward-looking managers will look to get assets on the market quickly, before the market really reprices, because you’re better taking a discount today off current valuations than taking a discount off a more heavily reduced capital value later.” As more sellers begin to capitulate on pricing and the bid-ask spread begins to narrow, that is expected to lead to a thawing of the market-wide freeze beginning next year.

This is PERE’s final Friday Letter for the year as the editorial team logs off for a well-earned break. We wish you all a tremendous festive season and happy new year and look forward to bringing you all the relevant private real estate insight and analysis we can muster in 2023.