Weakening economic outlook and stagflation pose key risks for real estate markets

The economic outlook has deteriorated with downside risks in place. We anticipate slower growth in 2023. Inflation is forecast to diminish in 2023 but to nevertheless remain above central bank targets.

Pressure to tackle inflation will force central banks to continue rate hikes, but the cycle could end sooner than expected if we end up seeing weaker growth. A period of stagflation or worse, a recession, would have negative implications for occupier and capital markets.

Real estate is not immune to a broader financial market sell-off or economic downturn, but, as a long-term investment, the fundamental tenets of asset quality, location and strong tenant covenants will remain as important as ever in driving returns and delivering secure income streams.

A short-term comeback of the office markets is unlikely as occupiers continue to postpone their decisions. The softening rental outlook and rising bond yields indicate a risk that office yields may start to rise as of 2023, pointing to a lacklustre outlook for capital values.

The outperformance of the industrial and logistics sector is expected to continue in 2022 but with lower returns and a narrower performance gap. Concerns about rental growth prospects could put some pressure on pricing, especially in non-core locations.

Due to increasing inflation, the polarization between conventional retail and convenience retail is becoming even more apparent. We continue to prefer convenience retail parks and retail warehouses as well as daily amenities and food retailers.

Please visit our website at https://www.savillsim.com/research/ for more information.