Schroders Capital Investment Outlook: Real Estate - March 2023

In this H1 2023 edition, we focus on the implications of market repricing over the past six months and key regime shifts underway.

15/03/2023
Manchester apartments and offices
Read full reportSchroders Capital Investment Outlook: Real Estate March 2023
16 pages

Authors

Kieran Farrelly
Head of Global Solutions, Real Estate

What are the key risks for the real estate market and what opportunities are emerging that investors can capitalise on?

Our new outlook summarises our local teams’ updated views and insights, as well as timely key data and trends, to illustrate the shape of the real estate market.

In this inaugural Investment Outlook for real estate (replacing our prior House View) we focus on the key fundamentals directly and indirectly impacting real estate markets, the implications of market repricing observed since the third quarter of 2022, inflationary pressures and corresponding interest rate volatility.

Key real estate risks and opportunities

With interest rates increasing significantly, transaction activity naturally slowed during the latter part of 2022 which resulted in double digit declines in pricing across major markets. We anticipate some further falls during 2023, especially in fringe markets and for secondary assets, but the repricing has already created attractively rebased investment opportunities and we anticipate a broader buying opportunity emerging as the year progresses.

Our proprietary global market valuation framework emphasises longer-term trends, and has in the past only identified value in highly selective property types globally. Given the repricing and improvement in outlook we now see more markets offering fair or better value, albeit we also recognise that further rebasing might occur. Private real estate debt offers value given tight banking market conditions and the ability to price in rate adjustments. Publicly traded real estate equity offer value in certain parts of the market as we believe share price declines have overshot long term fundamentals.

Schroders Capital's conviction themes creating investment opportunities

Our preferred strategies continue to be led by four conviction themes that are driven by secular trends, as follows:

Technology & the Knowledge Economy: The interface for work has shifted, consolidating value in those buildings which address specific needs and evolving tenant preferences

Individualism: Shifting individual preferences including lifestyle and consumption choices, have been accelerated by the COVID-19 pandemic, deepening disparities in demand between and within impacted sectors.

Ageing Populations & Demographic Shifts: Rapidly changing demographic profiles are rebalancing the accommodation markets, with systemic undersupply in certain segments.

People & Places – SCRE’s S&I Pillars: Higher industry and regulatory standards demand a holistic approach to the creation of value for investors and communities.

In this environment, investors should remain patient but move to a more neutral and less defensive stance than previous, positioning themselves to capitalize upon opportunities as the repricing cycle further progresses and markets recover, with a greater allocation to growth strategies than previous. 

Read full reportSchroders Capital Investment Outlook: Real Estate March 2023
16 pages

Authors

Kieran Farrelly
Head of Global Solutions, Real Estate

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