CRE lenders remain active as return forecasts improve
Discover key economic and financial metrics, and what to look out for in the week ahead.
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UK CRE lenders remain active
In contrast to the well-documented and defensive approach in the US, lenders remain active in the UK. In April, net lending to UK CRE (including developments) hit £1.2bn, up +137% m-m and its highest level since December 2021, according to the Bank of England.
This aligns with the UK Q1 2023 RICS commercial survey, which reported the first improvement in investment enquiries in a year. As detailed in my latest Commercial World note, the global context provides some reasons to expect CRE investment activity may improve further.
Over the next 18 – 24 months, we could see more activity in the market due to increased refinancings. Banks will be reassessing their risk exposure, while pressures on LTV and ICR covenants will likely persist due to the higher cost of debt.
Capital will be waiting in the wings to position through debt funds and fill some of the looming funding gap. Furthermore, liquidity for prime, safe-haven investments will come from purchasers less dependent on leverage, including high net-worth individuals and sovereign wealth funds.
UK CRE outlook upgraded
The latest IPF Consensus Survey has revealed an increasingly positive outlook for total returns in 2023. This was driven by improved rental and capital value growth projections, supported by a stronger-than-anticipated start to the year for returns.
The All UK Property total return projection for 2023 improved by +220bps to 1.5% in May from -0.6% last forecast in February. Total return forecasts have been upgraded across all sectors this year except for Offices.
Retail Warehouses are expected to be the best-performing sector, with a projected total return of 4.4%. Similarly, the consensus now expects a rise in All Property rents of 1.6% in 2023, up from 0.6% in February. Between 2023-2027, Retail Warehouses (7.4% p.a.), Industrial (7.0% p.a.), and Shopping Centres (6.6% p.a.) are expected to outperform All Property total return (6.1% p.a.).
Is volatility here to stay?
Since 2020, the VIX ‘investor fear gauge’ has been above its long-term average 68% of the time, indicating a prolonged and elevated level of volatility. This is unlikely to change soon. Central banks continue to trade off between avoiding a recession and persistently high inflation, a historic driver of macroeconomic uncertainty.
In periods of high volatility and uncertainty, investors tend to rotate out of riskier equities. Here the case for direct real estate remains. When adjusted for inflation, UK All Property total return (+5.47% p.a.) over the last 10 years outperformed that of equities (+3.95% p.a.), REITs (+2.52% p.a.) and government bond yields (+0.82% p.a.).
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