Research Briefing | Oct 13, 2022

Sinking market conditions drive real estate correction

The cost of debt for real estate has risen steeply in recent months, as credit conditions tighten, loan margins widen, and recession fears start to bite. Consequently, the implied prime yield required for a levered acquisition has risen 100bps-200bps since Q1 in key cities. As such, we now expect a quick rise in near-term property NOI yields, leading to a sharp correction in commercial real estate pricing.

What you will learn:

  • Globally, we expect capital values to decline 6% in 2023. This is notably more than the correction seen in 2020 (-2.2%), but well below cumulative GFC declines (-17.8%).
  • The pricing correction will hit all markets in our real estate coverage, but the impact will vary significantly. In advanced western economies, where NOI yields are lowest and rate hikes have been more rapid, we expect the largest pricing corrections. We forecast all-property capital declines will reach 8% peak-to-trough in Canada, 12% in the US, and 13.3% in the UK. Conversely, smaller corrections are expected in Singapore (5.7%), Poland (4.2%), and Japan (3.4%).
  • We anticipate the largest pricing corrections will be in the industrial and residential sectors, where NOI yields have fallen to record lows in recent years. In the US, this means a correction of 13.3% for the apartment and over 16% for industrial.
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