Real Estate Investment Opportunities Amid Macro Uncertainties

Macro uncertainties and tightening financial conditions are pressuring the real estate investment market. Tim Wang, Head of Investment Research for Clarion Partners, discusses the challenges and opportunities in this current environment.

Key takeaways:

  • Macro uncertainties are currently elevated due to higher inflation, interest-rate increases, recession risks and the Russia-Ukraine war.
  • Tightening financial conditions are putting pressure on property cap rates (one measure used to estimate and compare the rates of return for commercial or residential real estate properties). However, we believe sectors with strong fundamentals and properties with leases that are linked with inflation indexes, have a competitive edge in today’s environment.
  • Secular and demographic-driven sectors look attractive to us because they tend to have stable cash flows, have less volatility and be more recession resistant.
  • We also believe that environmental, social and governance (ESG) and social impact are a secular theme that will become an increasingly bigger investment mandate by institutional investors.

Macro uncertainties affecting real estate investing

The current macro environment is unique and complex with significant uncertainties. The COVID-19 pandemic disrupted daily life and normal market cycles. It also led to a synchronized global recovery, global inflation and central bank tightening. A synchronized global downturn seems likely as a result. It is possible that the United States and Europe will likely experience recessions later this year or early next year.

However, not everything is negative. Consumer spending, especially in Europe and the United States, has been holding up well. Strong household wealth, balance sheets and corporate earnings also appear encouraging. Leverage, especially in the banking system, is low compared to 2007 before the global financial crisis (GFC). For all these reasons, we believe a potential recession or downturn will not be as severe as the GFC. Consensus forecasts also show possible improvements in 2024.1