Even as the coronavirus crisis continues, many real estate investors will already be eyeing the right moment to re-enter the investment market. As the research team at investment house PGIM Real Estate puts it: “The reality is that a lot of capital has been raised in recent years and, unlike in past downturns, looks like it is here to stay.”
PGIM Real Estate’s new paper, “Real estate during a crisis”, looks at what kind of yields would signify a good re-entry point for buyers in the global office investment market, assuming falling rents and a 10-year hold period.
If rents fall by an amount similar to their drop during the global financial crisis, PGIM Real Estate calculates, yields would need to be about 125 basis points higher on average to compensate, and so global office yields moving from 4% at the end of 2019 to about 5.25% would be “a strong buy signal”.
“Yields may rise further than this in a prolonged downturn, but this point would enable investors to secure a return over time in line with estimated hurdle rates,” PGIM Real Estate’s paper said.
Markets that have seen the steepest drops in yields now appear most exposed, according to PGIM Real Estate.
“Low-yielding markets were relying on a combination of solid growth potential, low risk premiums and low interest rates to sustain pricing,” the team said. “Given that the current crisis is set to weigh on growth potential and push up risk premiums, markets like New York, San Francisco, Hong Kong and Paris may need to see a correction to attract fresh capital inflows.”
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