Private real estate’s recovery has been put on hold

The International Monetary Fund’s latest global economic outlook on the impact of the Ukraine war has worrying implications for the industry.

The International Monetary Fund delivered a dismal forecast of the global economy when it released its latest World Economic Outlook this week.

Largely because of Russia’s invasion of Ukraine, economic prospects look far bleaker than they did in January, when the IMF predicted that a fledgling global recovery would begin to strengthen during the second quarter. Although the report is broadly focused on the global economy, some of its findings also have worrying implications for the private real estate industry. Below, we highlight two takeaways that stood out for us.

Inflation is likely to remain high for longer

The IMF anticipated the war will further exacerbate inflationary pressures, which in the US and some European countries are at the highest levels in more than 40 years. For 2022, inflation is projected to reach 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher, respectively, than in the IMF’s January outlook.

Although it is a matter of some debate, real estate is widely thought of as an inflation hedge. In its 2022 global economic outlook, bank JPMorgan Asset Management anticipated the asset class would continue to deliver strong risk-adjusted returns with meaningful inflation protection amid a rising rate environment over the coming 12 to 18 months – provided economic growth continues unabated.

But as the IMF projected this week, global growth is likely to slow significantly in 2022 largely because of the war, from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 to 2023. That is 0.8 and 0.2 percentage points lower for 2022 and 2023 than in the institution’s outlook in January. This raises questions around real estate’s performance outlook in the near term, as well as the sector’s ability to continue to offer inflation protection.

The end of government support

Current high inflation has been driven by both surging commodity prices and supply-demand imbalances, the latter of which was driven in part by extraordinary government support. To help free up resources to aid the recovery, the IMF recommended in its report that certain governments now scale back on assistance: “Where the recovery is well underway and private balance sheets are in good shape – mainly in advanced economies that benefited from generous government support during the pandemic – fiscal support can be reduced faster, facilitating the work of central banks.”

Government support is no insignificant matter for real estate, given the sector has received significant amounts of assistance from federal, state, provincial and municipal governments during the pandemic. These have ranged from indirect support, such as rent relief programs and changing of eviction rules, to substantial direct financial support of landlords in the form of checks to tenants to help the latter pay their rent.

“The majority of efforts to support landlords – from requiring rent deferrals to funding building retrofits – have served to avoid a panic or sell-off in the sector,” consulting firm McKinsey & Company stated in a January 2021 report. Given the importance of government support in keeping landlords afloat, further withdrawal of assistance could spell trouble for some property owners and potentially trigger an uptick in distressed sales.

Like the IMF with its January report, private real estate professionals had largely anticipated 2022 to be a year of strengthening recovery for the sector. But with the disruption brought on by a war with no apparent end in sight, that recovery is currently on shaky ground. It is difficult to know when ‘recovery’ will feel like an appropriate word to use again to characterize the state of the industry.