Time for realism
As a real estate advisor, my duty is to provide an honest and comprehensive view of the market.
The market has encountered many challenges recently, especially on the transaction and financing side, and predicting the future is currently very difficult. The global economy is still recovering from the pandemic, and economic uncertainty weighs heavily. Central banks are battling inflation, which has led to an exceptionally rapid rise in interest rates. Although these rates now appear to have somewhat levelled off, the sudden increase has prompted serious concern among investors.
As the interest rates rise, the cost of servicing loans for property owners increases, inevitably leading to a slowdown in the transaction market, as seems to have happened now. This decline in investment is evident in a recent survey, which showed a net 19 per cent of fund managers globally were underweight in the real estate sector – the lowest level of exposure since the 2008 global financial crisis (Chis Flood, Fund managers cut commercial property exposure to lowest since 2008 May 16 2023).
Many advisors have remained cautiously optimistic about the market, perhaps due to a strong project pipeline and the fact that sellers have started to launch projects again after a challenging period. However, in our view, the significantly reduced deal certainty is not currently considered, and the future may not be as full of transactions as some expect. Instead, a long and rocky road may lie ahead, and all property owners should prepare for this.
The combination of economic uncertainty and overvaluation may create a perfect storm for the real estate market. It is vital that investors and property owners exercise caution, reassess their portfolios, and prepare for a potentially challenging future.
In these difficult times, our data-driven approach as advisors sets us apart from others. By leveraging better analytics and insights, we can make informed decisions as we navigate the complex real estate field. Our strong data foundation enables us to identify trends, mitigate risks, and uncover opportunities that others may overlook, even in difficult market conditions.
Despite the challenges, skilled advisors can still find opportunities to succeed. By remaining persistent, working hard, and adapting to constantly changing market conditions, good advisors can help clients navigate the real estate landscape, identify promising investments, and mitigate risks. The key is to maintain a realistic view, continuous self-education about market trends, and develop creative solutions to the unique challenges of this uncertain environment.
P.S. The fourth annual Reagle Invitational golf tournament will be held on the first of September. We have sent out the invitations. This competition has proven very popular and as such, we have a limited number of spots available. Therefore, remember to follow up on your invitation promptly. If you haven’t received an invitation and feel that you should have, please do not hesitate to contact us. 😊
– Henri Hakala
Let’s keep in touch!
Henri Hakala
henri.hakala@reagle-fi
+358 415 063 101
About the Market
Face the facts
When you hit the peak, the only way forward is down. During recent years we have experienced a thrilling journey in the real estate investment market, witnessing a significant number of transactions and at times unbelievable property prices. The Finnish real estate market size has expanded by approximately 14 % from 2020 reaching EUR 96,7 billion in 2022.
It was an exciting and enjoyable ride, thanks!
Now we are now entering a different phase and the ride has come almost to a halt. Fortunately, we have avoided overwhelming panics and most of the property owners are approaching the situation rationally and seeking solutions. In various meetings with real estate industry stakeholders, the consensus is that it is time to return to the fundamentals.
Let´s try to see some of the explicit fundamentals of pricing and yields. Considering both growth and depreciation the term Property yield can be written as very simple function:
Now, let´s break this down:
1. Risk-free rate
Fact: The risk-free rate has risen to a new level, which should increase the yield required from property investments compared to alternative options.
This is a well-known fact and shown in many market presentations and different articles. The problem is that this effect is not fully taken into account in valuations. What once was a prime office yield is almost the same as bond rate now. This shift is evident as more capital is being allocated to investments outside the property markets.
2. Risk premium
The risk premium is unique to each investment and encompasses various factors, including macroeconomics, local property risks, lease agreements, and tenants’ financial capabilities. Recently, ESG (Environmental, Social, and Governance) factors have gained importance and influence in this parameter. Different market participants perceive property risk premiums differently, especially during times of uncertainty, when this number tends to increase rather than decrease.
Fact: Risk premiums have increased to a new level and are not coming down anytime soon.
3. Inflation and expected rental increase
How to analyze office rental agreements if no-one is using the office? Topic that has been extensively covered numerously. Rising costs impact the yields significantly, particularly in terms of rental growth. If the added costs cannot be transferred to income, it will affect the overall income.
Fact: Inflation has increased, and the actual rental increase is uncertain.
4. Yield
In 2021 hypothetical office prime yield was 3,5 % at some point having 10 Y Finnish Government Bond been 0 % (or even negative) and inflation at 2 %. Keeping depreciation and rental growth constant; in theory this gives no room for the actual property risk premium.
Fact: Property yields have risen to new levels.
This is something that many property owners and investors find hard to understand. Many owners are waiting for better days and prices to return, maybe after summer, but that is very unlikely. Valuators are baffled by how to address property valuations when there is no evidence and the market is changing rapidly. It is like shooting a moving target and once you take the shot the target is already elsewhere, i.e. the basis of valuation might have already changed. There is a consensus that yields are higher but how high are they, and what is the new level especially in non-prime areas and between different asset classes.
By leveraging better analytics and insights will help in uncertain conditions and provide better understanding for new opportunities. That is where we at Reagle are good at.
Advice: Be truthful and listen to facts.
For more scientific and further detail refer to e.g., Baum & MacGregor, 1992
Want to talk about data and insights?
Olli-Pekka Mustonen
olli-pekka.mustonen@reagle.fi
044 522 26 39
And that’s how it’s done
In a difficult market situation, it is not enough to just pray that everything will be better when fall comes. Our job as an advisor is to strive to influence the market, and to make the market work. Thus, we need to actively bring buyers and sellers together, create evidence in the market, and through that, to generate liquidity so that investors who have been stuck in uncertainty dare to act.
Navigating through a difficult spring has required hard work and market knowledge. We have achieved successes by being able to identify suitable buyers and sellers that can reach an agreement. Not everything goes smoothly – risk is currently approached with excessive caution, whereas just over a year ago it was still approached “just” calmly.
In recent weeks, our Deal Bell (in the picture) has been ringing frequently as six transactions have been completed. Geographically, the range is wide, from the southernmost part of Helsinki to Northern Finland. The segments have included LI&W, healthcare, accommodation services, offices, and development projects.
These transactions haven’t come easily. Many projects have experienced schedule delays, changed buyers, and fluctuating prices. However, instead of raising our hands to surrender we have found solutions. We are accustomed to going the extra mile, not just receiving offers, and organizing bidding competitions, and this knowledge has shown to be very beneficial in the current market.
It’s important to know the investors to be able to find that unique angle that awakes the investors’ interest and sets the asset apart from the competition in the market.
Let’s keep in touch!
Alexander Doepel
alexander.doepel@reagle.fi
+358 503 053 409
Team’s greetings
Running for a good cause
This was the second year in row that we took part in the Yritysmarathonviesti – the biggest running event for companies that took place in 26th May at Töölönlahti.
Those long kilometres of training paid off as we braved the turbulent Finnish spring weather.
This friendly event is for supporting after school exercise opportunities for children and has already made possible for 30 000 children to take part in after school clubs.
