An estimated 23,000 people descended on Cannes from March 14-17 to learn from their peers, explore potential new opportunities and brainstorm the next chapter for real estate.

But, just days before MIPIM began, the news of Silicon Valley Bank and Signature Bank’s demise in the US sent financial markets into panic mode. This was followed mid-conference by a dramatic fall in the share price of Switzerland’s second-largest bank, Credit Suisse. PERE’s attempts to gauge industry opinion at MIPIM on this string of events were met first with looks of unease, but were generally followed by an assertion that real estate is unlikely to be impacted to any meaningful degree.

“SVB operated in a very specific ecosystem, so it is not a signal for the entire economy,” said Isabelle Scemama, global head of AXA IM Alts, the alternatives investment arm of French insurer AXA. However, the fact that “everyone is talking about it at MIPIM” shows the industry is more mature and transparent than it has been when it comes to addressing financial shocks. “There is no denial in real estate anymore,” she added.

In the case of Credit Suisse, executives were quick to point out that the lender – which rival Swiss bank UBS agreed to buy for $3.25 billion in the days after the curtain closed on MIPIM 2023 – has faced a string of problems and scandals going back several years. Whether this could be a spark to light a flame was therefore debatable.

“Personally, I think true contagion is unlikely,” Rob Wilkinson, European CEO of Boston-headquartered manager AEW, told PERE. “Capital markets are not particularly strong at the moment, meaning it doesn’t take much to get them spooked.” While it would be premature to predict a financial crisis off the back of these bank failures, what the withdrawals from the banks reveal about investor sentiment is a broader concern, particularly given that most are already grappling with an allocation imbalance by way of the denominator effect. “What’s happened in the last few days will make people hesitate, but for how long?” mused Wilkinson.

One US-based fund manager, who wished to remain anonymous, struck a more admonishing tone. “I expect more ‘micro shocks’ in the banking sector such as what happened with SVB and Signature,” the manager said, arguing more fallout from rising interest rates is likely. Valuation adjustments may be accelerated in Europe, but the full extent of the reset is yet to work its way through the US office market in particular. “The impact there could be significant for owners and lenders. Until that plays out, I cannot see there not being more bumps in the road ahead.”

And the rates keep rising. Although rising rates were considered to be one factor behind the banking crisis, the European Central Bank plowed ahead with its signaled intention to continue hiking rates, increasing its main rate by another 0.5 percentage points to 3.5 percent on March 16. The Federal Reserve is also widely expected to raise rates at its meeting this week.

A necessary evil

Such recent events brought the industry’s susceptibility to micro and macro shocks sharply into focus at MIPIM, with PERE’s conversations pervaded by preoccupation over rising interest rates and a realization that the easy-living era of free money is over.

Philipp Schaper, CEO European real estate at Augsburg, Germany-headquartered real assets manager Patrizia, told PERE there is too much uncertainty in the market for the world’s largest property conference to catalyze its usual spurt of activity. “This year, I don’t think anyone expects a wave of new product launches because it’s MIPIM. In fact,” he adds, “the industry has been pushing back the restart of the engine quarter by quarter since the last EXPO REAL [held in Munich in October 2022].”

What brought the ‘engine’ to a halt was, of course, the pressure of rate hikes kickstarting a major price correction. MSCI’s Global Quarterly Property Index returned -3.8 percent in Q4 2022. That real estate values in the UK are falling faster than any other market was a common talking point at MIPIM, and substantiated by the MSCI UK Quarterly Property Index’s loss of 11.9 percent in Q4, close to double the loss of the next major economy in the global index, France.

Although many were surprised at the speed of the UK’s decline – and expect the rest of Europe and the US to feel the full extent of the correction in due course – most executives who spoke to PERE viewed the repricing as a positive for the industry. “A quickly repriced market is better than a false market with out-of-date valuations and low liquidity,” said Tony Brown, CEO of M&G Real Estate, the real estate investment arm of UK savings and investments business M&G.

Many were quick to extol the “strong fundamentals” underpinning their confidence in most sectors: favorable supply and demand dynamics, positive forecasts for rental growth and a dearth of capital waiting to be put to work. Logistics and residential were frequently named in this category. Office and retail were harder to generalize.

Despite the unanimous belief that prices are not yet settled, PERE sensed a keen excitement to realize the investment potential that accompanies the start of a new cycle. “Every crisis is always an opportunity,” said Scemama. “My convictions on the importance of real estate in an investment portfolio have not changed at all since the pandemic – if anything, for the asset classes we’ve been investing in, they are more accurate than ever.”

Hitting a wall

While appetite to buy is not under question, the future direction of rates is too great an unknown for most buyers, sellers and allocators to conduct business as usual right now. According to broker JLL, quarterly global direct investment volume declined 58 percent year-on-year in Q4 2022. This slowdown may continue for some time. “We have started to transact here and there, in pockets of the market, but there is still only a very low transaction volume across all property types,” said Lars Huber, CEO of Europe at US manager Hines.

Limited supply is a problem, with owners choosing to hold assets for longer if they are at liberty to do so, but the bid-ask spread is the primary obstacle to transacting for most. With buyers and sellers alike searching for an answer on pricing, some action is happening behind the scenes. Mark Meiklejon, head of the real asset investment specialists team at London-headquartered manager Aviva Investors, told PERE that “people are testing deals off market and then withdrawing them.”

If the mood on La Croisette is anything to go by, most real estate investors are content to kick the can down the road for a little longer to see how monetary policy responds to the latest episode of financial market turmoil. With managers eager to deploy their swelling capital coffers, hope was still alive and kicking in Cannes, but rates are a thorn in the side that will be difficult to tease out.