Article

Investor caution dampens real estate investment

Caution persists as macroeconomic factors challenge decision makers

November 16, 2022

An uncertain road ahead for the economy, monetary policy and geopolitics is impacting real estate investment.

Global direct investment in real estate during the third quarter was US$234 billion, down 24% from the same period last year, according to JLL data. The drop marked the first quarter of annual declines in real estate transactions globally since the onset of the COVID-19 pandemic.

“Many investors remain cautious and are delaying decision-making,” says Sean Coghlan, global head of capital markets research and strategy at JLL. “In most markets across the globe, repricing of transactions is now common, and a prolonged period of price discovery is impacting investment conditions.”

In a sign of caution, bidding dynamics weakened across all real estate sectors during the third quarter. The average winning bid-ask spread declined, as well as the variability of bids on transactions.

“This is having an impact on market efficiency and muting transaction markets,” Coghlan adds. “The outlook is now more uncertain.”

Varied performance

However, some real estate sectors are performing better than others. Momentum is faltering in the office sector, with structural and cyclical challenges impacting leasing activity.

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But investment in retail and hotels rose 19% and 7%, respectively, in the third quarter year-on-year, JLL says. Investment in the living sector – which includes multi-housing / build-to-rent and student housing assets – was up 9% year-to-date, despite declines during the quarter.

“Performance across sectors varies – much of the recent rebound reflects the pent-up growth from sectors that have been lagging,” explains Coghlan.

More broadly, as assets are tested by market volatility, investors are increasing their focus on portfolio strategy, Coghlan adds, while opportunistic managers and some of their investors are anticipating dislocation to result in investment opportunities.

While dry powder remains at near-record levels, global fundraising by closed-end real estate funds continued to fall for the fourth consecutive quarter, down 46% year-over-year.

“Rising rates and uncertainty have triggered capital constraints for more market participants, who are increasingly patient and remain on the sidelines,” says Coghlan

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Lending caution

The caution extends to debt markets amid increased scrutiny on underwriting assumptions and more stress-based calculations. Volatility in credit spreads remained high during the third quarter, limiting lenders’ ability to price aggressively, especially for larger deals that require lenders to club loans.

“Having lagged the U.S. market, pressure on underwriting has grown in Europe and Asia in the latter half of 2022,” says Coghlan. “Volatility is not uniform across lenders, with lender appetites shifting with market conditions.”

Economic headwinds are strengthening with several major economies expected to tip into recession in 2023. However, some countries, such as commodity exporters, are faring significantly better, reflecting an uneven slowdown, Coghlan says.

“Central banks continue to act aggressively, with more rate increases anticipated into next year,” says Coghlan. “This is filtering through to heightened uncertainty and continues to weigh on sentiment.”

Find out more in our latest Global Real Estate Perspective