Investment management company M&G recently published a report on the risks to the global real estate market and their sources. The conclusions of the company's research were clear: “The market is holding up, but the danger has not yet passed.” Among the main market obstacles and risk factors, M&G points out the tightening of conditions for issuing loans in addition to rising interest rates, the instability of the banking system as a whole, the presence of a number of structural changes in the construction sector, including the need to place a greater emphasis on ESG criteria, as well as prevalence of hybrid employment scheme.
M&G adds that the global property market is facing a “prolonged period of tightening lending conditions as banks and other lending institutions impose stricter financial controls” on who can lend what money. This would lead to a scenario that would “make it difficult to recover and increase capital values,” especially in those market segments “that have significant exposure to risky assets and overleveraged investors. Some are already faced with the need to turn to refinancing.”
Separately, the situation in the United States is noted, where one of the main problems is the “stable, disproportionately large-scale provision of loans to real estate owners and developers by medium-sized commercial banks,” which “exposes the entire banking sector to serious stress from the risks of mass bankruptcy” of both borrowers and the financial institutions themselves. institutions. According to M&G, almost 30% of all loans issued by regional US banks are to commercial real estate borrowers. This is much higher than the values observed in the UK and EU (around 5%). At the same time, commercial real estate in the United States is in a particularly vulnerable position today.
However, the study indicates that at the moment, real estate investors, especially those with debt, are still acting cautiously and taking into account the uncertainty in the market. A fairly small percentage of people prefer to deal with risky assets. Otherwise, they demand more compensation for more risk. According to M&G, this is reflected in the migration of investors “towards quality and sustainable assets that create guaranteed cash flows.” The vacancy of less stable assets, including offices and retail real estate, is growing.
M&G also points out that due to the lower availability of borrowed capital and greater risks of losses, the volume of investments in “sub-prime” assets will be reduced, which will be reflected in a fall in their value. A circle is created where a risky asset will lose value due to its riskiness, which will discourage even more people from investing in it and lead to an even greater loss of value. The same situation applies, for example, to the compliance of objects with environmental standards – if the object does not receive attention from investors due to non-compliance with standards, the owners will have less motivation to invest money in renovation.