Annus Mirabilis

The Golden Age of Investing is nigh.?

We are approaching the most telegraphed global recession in history, or perhaps already living through one. There in strong consensus on declining corporate earnings, reduced capex, increasing job losses and relentless pressure on public market valuations – by any measure major headwinds for a strong recovery anytime soon.

However, it is increasingly clear that sometime during 2023 we will see the best decadal opportunities to invest.?I argue for a bullish case for commercial real estate over the course of the next 12-18 months.

In the months to come, we will largely complete the transition from a regime of peak over valuation and indiscriminate investing – “let’s buy the market” approach - that characterized global real estate markets in the run up to the covid triggered crisis.??

Real value will emerge for the first time since 2012.?Active management is needed to make the most of the emerging opportunities in what is likely to be a slow growth environment.

To capitalize on the change in regime and sentiment, we need to prepare in advance.?Priority items that need a recommitment and refresh include:

1.?????Buy Lists - revisit of strategy and market selection.

2.?????Focus on turning Leading Indicators – for example, credit spreads, new order ISM, job claims, business confidence.?An excessive focus on Lagging indicators will lead to missing the obvious turning points in the market.

3.?????Strengthen the Talent bench. ?A high-quality outcome needs a top team.?Talent remains scarce across board.

4.?????Deepening relationships - sellers, buyers, LPs, financiers, advisors, tenants.

5.?????Embed sustainability in all investment processes.?The future is unmistakably Green.

These four (4) primary reasons make me optimistic:

·???????The fog has lifted substantially on macroeconomic risks, unknowns are known.

·???????Price action increasingly evidences the reset in valuations.

·???????Peak pandemic risks have dissipated.

·???????Global Liquidity is showing signs of bottoming.

Macroeconomic Risks

The consensus view points to higher interest rates for an extended period, constrained central bank balance sheets in the face of relatively higher inflation, imbalances in regional growth and continued geopolitical risks.

In a US dollar dominated world, the rest of the world has negligible wiggle room to ease financial conditions domestically until the Fed feels confident about taming inflation. ?The 2% inflation target for the US Fed currently seems well out of reach. ?FFR (Fed Fund Rate) projections are volatile and anticipate peak interest rates in the region of 5% by end of 2023.

A higher discount rate has destroyed market capitalisation for listed real estate.?Should that chronic discount over private markets persist, the knock-on effects will soon be more evident in sales and refinancings.?Many private funds approaching maturity may realise those notional losses.

The short end of the yield curve needs a close watch to see signs that the market is signalling a recovery.?The US 2-year Treasury yield declining sustainably, rolling 4-week basis, is a measure to focus on.?Other leading indicators to parse for signs of improvement include those such as home building permits, jobless claims and improvement in new order ISM figures on back-to-back monthly readings.

Whenever the Fed will pivot, it will likely cut interest rates almost as quickly as the record pace of hikes in the past year. For context, the annualised CPI rate since June is 2.4% and by the same measure it is 1.1% annualised for PPI.?Rate of change matters. Inflation is falling a tad faster than most anticipated or the mainstream media reports.?The Fed tightening is having a material deleterious impact on the economy.?The risk of tightening is now to the downside.

Price Action

Value-add US office assets are being priced at a discount comparable to the 2009 crisis.?UK new build residential carries a sticker price reflecting a 30-40% sale.?China asset backed loans can’t be priced.?German prime commercial office and retail are being marked down 10-15% by valuers.?Hong Kong commercial real estate land auctions reflect decadal low demand.

Land for development, across most OECD markets, is now priced 15-30% lower than the pre pandemic peak.

Sectoral and country specific imbalances persist.?While these exceptions highlight the bear market volatility, they don’t evidence sustainable relative strength.?An obvious example is Singapore residential prices which reflect literal flight to safety.

As a turning point, watch out for sales which attract little or no competitive bids.?Or bids which reflect a wide dispersion in prices offered. Like me, if you were active in the markets during the lows of March-June 2009 or during the peak of the Arab spring-Eurozone crisis of 2011-2012, you may recall prime assets being sold for near/ below asking prices with at best 1-2 unconditional bids.?We may or may not get to the same lows in sentiment again.?The rate of change in demand will become self-evident as a cyclical low.?

“We prefer to wait and watch” will become an oft heard boardroom/ IC stance justifying still on cash. ?Funds and owners who need to sell in the current environment will feel the pain.?However, it’s unlikely we will see a glut of supply or fire sales near comparable to the financial crisis from 2008-09.

Peak COVID crisis is over

As China takes us back to the future with its rather hurried but much needed reopening, it is a matter of time before which consumer demand and supply chains stabilise.?Possibly by mid-summer. In my extensive travels through Asia during the past 6 months, the urge to get on with economic life as usual from consumers and governments is palpably strong.?

What will linger on is distrust based on policy and geopolitical frameworks given what has happened since March 2020. As it relates to investing in the global real estate opportunity set, I expect market selection to remain concentrated on “friendlier” jurisdictions.?The biggest beneficiaries in the Asian context in terms of net increase in capital inflows targeting the property industry have been Japan, Australia, Singapore, and India.?This trend seems sustainable over the medium term.?

The prospects for South Korea are directly correlated with pick up in China trade and normalisation of interest rates. Should travel normalize by mid-year 2023 in time for summer holidays, a strong tourism and travel related recovery will fuel further growth across ASEAN and rest of Asia.

Global Liquidity has stopped falling

The rate of change of tightening is slowing and by some measures has bottomed and even reversing in some jurisdictions.

By some estimates, China alone has pumped RMB 850 billion since August 2022 to ease financing conditions in anticipation of pick up in business and household demand.?As the Fed continues to monetise its balance sheet and grapples with a seemingly persistent inflationary outlook, expect choppiness in policy action underpinned by a desire to ease, as debt servicing costs and job losses progressively mount.

For Asia, the relative lack of strength of the USD dollar from the October 2022 highs is another tailwind that hopefully persists.?Off almost 9% in the past quarter, the declining USD provides breathing space on currency pressures and domestic inflation with follow throughs to household and business balance sheets.?

The bias is for central banks to be opportunistic in easing at every instance based on steadily improving data on PMI, housing market correction, and retail sales.?Base effects will take time to manifest in consistently directional data which gives market participants confidence to act and recommit to capital expenditure.

Real estate has at its core has an accommodative use.?Offices for businesses to provide goods and services, Shops for retailers to showcase and sell their merchandise, Home for households to seek safety and enhance quality of life and so on.?

Let’s also remind ourselves that the global population recently hit the 8 billion mark and nominal GDP edged above $100 trillion for the first time.?

If no major geopolitical events reverse the current recovery, which is patchy at best but unmistakably underway, it is time to double down and prepare for the best time in a decade to be investing again. ?

Let’s play.

Views expressed are entirely personal.