Savills IM identifies the threats to the near-term macro picture, the most notable being rising inflation, interest rates and recessionary risks impacting investment and occupier markets.

Interest rates will impact those with high levels of debt, with £60 billion of outstanding loans due to be refinanced in the UK within the next two years. The picture is similar across many other markets. Occupier markets are also likely to experience instability, as reduced growth and the threat of recession increases the likelihood of occupier distress.

However, those who prepare now will be well positioned to benefit when the next upturn arrives; those assets with strong income streams and robust ESG credentials are particularly inviting for investors.

In terms of sectors, Savills IM believes that affordable housing presents a long-term growth story, with strong demand, predictable yields and a compelling social impact. One thing is clear, the public sector cannot afford to meet the demand for social housing on its own, and the private sector is increasingly keen to help fund new developments, and improve existing stock, by working in partnership with housing associations and local authorities over the long term.

Elsewhere, real-estate debt markets provide opportunities for alternative providers. Against a backdrop of volatility, traditional lenders are likely to act with a high degree of caution in 2023, restraining the supply of debt finance. As those looking to refinance are forced to lock into higher rates and face more restrictive terms, alternative providers will be able to offer an alternative.  They can also provide debt in certain sectors/assets of varying quality that banks are less willing to lend on. 

APAC is also increasingly being seen as a relatively safe haven region to diversify away from the turbulence being experienced in other markets. Less aggressive inflation and a resilient jobs market means that economies in Asia are much better positioned to drive an economic recovery. As interest rates normalise, the income component of returns will become much more important. Those investors and asset owners who are able to adapt to new trends, such as providing well-equipped buildings that occupiers find appealing, and that meet increasingly demanding ESG regulations, will be rewarded.

Kiran Patel, Global Chief Investment Officer and Deputy Global CEO, Savills IM, commented: “It is clear that 2023 will present challenges for real estate investors. The scale of yield expansion remains to be seen, and payment shocks await those seeking to refinance within the next 12-24 months. However, this time of high market stress will present opportunities to those investors with the requisite market knowledge. In the residential sector, we are positive on the outlook for affordable housing, where the role of private capital is only set to grow in importance, and despite rising yields, we also see attractive entry points for investors in multifamily as valuations fall in line with the wider real estate market. Debt markets continue to provide attractive risk-adjusted returns with downside protection. The transaction flow for active lenders is likely to involve a high level of refinancing enquiries as loans previously eligible for traditional bank debt now fall more squarely into the investment criteria for alternative lenders.

The strong structural trends associated with urbanisation benefit both convenience retailing and last-mile logistics. We see compelling reasons for these types of asset classes and see an opportunity to build exposure during a brief period of pricing weakness. 2023 will be a challenging year but unlike previous global downturns, overall lending to real estate has been more controlled, the excess supply of new property has been severely limited and we enter a downturn with robust employment levels.  Real estate will benefit from income growth but increasing costs for the occupier and investor in the form of energy, labour and higher interest payments, will result in an offset in pricing. We see this period as short-lived and therefore concentrating buying efforts towards sectors/assets with long-term structural fundamentals when prices have adjusted, will provide an excellent entry point into the next cycle.”

Piotr Trzciński, Head of Poland, Savills IM, said:  „In Poland, the rental growth is underway, especially for prime office, logistics and BTR sectors which offsets the decompression of yields to an extent. This may benefit owners of existing assets which may outperform their baseline total return, in particular in office markets facing supply gaps like Warsaw and core logistics or living markets. On the flip side, the longevity of rental growth will be impacted by the inflation-driven increase of operating costs, with greater pressure on landlords to counter it, possibly higher shortfalls and vacancies and reducing tenant affordability such as retail and BTR sectors. Provided no external disruptions, the inflation rate in Poland should plateau in 2023, but remain elevated due to high nominal wage growth, possible new social transfers in what will be an election year, low unemployment and gradual pullout from anti-inflation shields.

The lending market will remain tight and selective in 2023 both for funding new projects and refinancing loans taken in an era of low-interest rates. This may open opportunities for alternative lenders.

On capital flows, I expect liquidity to be subdued in the next 6 – 8 months. Investors are wary of the geopolitical backdrop and the uncertainty around the depth of the recession in the region. CEE or Scandinavian capital may replace more traditional investors from Western Europe, US or Asia benefitting from reduced competition for quality assets. Those who already have an allocation to the Polish market having entered early in the cycle say 5-7 years ago (e.g. in logistics) may want to explore exit as and when new price points stabilize.”