Property dealmaking is set to plummet and values to fall as investors adapt to a “new paradigm” of rising interest rates and a global economy in turmoil, Brookfield has said.
Brad Hyler, head of European real estate for the Canadian private equity fund, said property investors had been caught cold by the rapid deterioration in the economic outlook.
“The pace of change and the shift in sentiment from reasonably positive to negative across the board has been a big adjustment,” he said.
That shift is chilling the property market. “Banks have gotten more selective, more risk-averse,” said Hyler, adding: “We are expecting transaction volume to decelerate pretty significantly – it already has.”
He is confident there will be a market for “higher quality assets”, but warned that values in out-of-favour sectors such as offices could fall sharply, with interest rates and inflation adding to property owners’ costs at the same time as the gloomy economic outlook weighs on tenant demand for new space.
Stress is likely to emerge when landlords come to refinance mortgages, warned Hyler. With rates having risen fast since the start of the year and tenant demand for older office blocks waning, borrowing costs for some could exceed income from the building.
Shares in some of the UK’s largest listed office owners were decimated last week after analysts at Bank of America turned bearish on the sector, warning that office values were likely to fall by 12% by 2024 and rents would flatline.
British Land and Workspace, both subject to downgrades by the bank, shed more than 10% in a week when about £2bn was wiped from the UK listed sector.
For Brookfield, which built a circa 10% stake in British Land early in the pandemic with a view to a potential takeover approach, a repricing could open up the prospect of snapping up office assets or whole businesses.
