Inflation has broadened around the world and reached multi-decade highs, prompting central banks to become much more hawkish for fear of price rises getting out of control. In the past, real estate returns have generally accelerated as inflation has increased, while also providing good inflation protection.
“Interest rates are just one of many factors influencing real estate performance”
Interest rates are just one of many factors influencing real estate performance. In 2022, we expect the Fed to raise interest rates four times, possibly more. In the eurozone, we expect rates to remain flat, though the ECB could be prompted to hike. In the US, interest rate rises have typically gone hand in hand with accelerating real estate returns, and any cooling impact from rate rises on performance has tended to occur with a delay.
It’s not just interest rates
The other key factors we see driving real estate performance are what is happening in the economy and the level of development activity. Economic growth is a strong driver of real estate returns, given that, when the economy is growing, firms typically are taking on more space and bidding rents higher. At the current juncture, with rate rises expected to be accompanied by decent economic growth, we think global real estate returns will slow in 2022 but remain positive and in the range of 5 to 10 percent.
Another important factor supporting real estate at the moment is spreads with bond yields, which are around their historical average. This is quite different from the global financial crisis period when spreads compressed and were even negative in some markets.
Predicted global real estate returns in 2022, according to UBS Asset Management
For cross-border investors, hedging costs are also an important consideration. Hedging costs were leveled at the start of the pandemic as interest rates around the world converged to zero or below. Rates are now expected to rise in the US. In the eurozone, rates are expected to remain on hold or possibly increase, but by less than the US. As such, hedging costs are set to move higher for investments into the US versus the eurozone.
We think the US real estate market will continue to outperform in 2022 and that, across all markets, big differences in performance will persist by sector, with industrial and logistics continuing to lead. We expect more muted returns from offices and retail, though retail is starting to turn the corner in some markets, led by the UK and Australia.
Uncertainty hangs over the office market, but we expect the best offices in terms of location, ESG credentials and facilities to perform well and be the most resilient to hybrid working models. We also expect niche sectors, such as lab space, to perform well and continue to grow.