When will the pricing of UK real estate stabilise?
We are currently on a journey of price discovery.
As the 31 December 2022 valuations start to come in, the majority of real estate sectors in the UK are feeling the pinch in terms of valuation shifts. 30 September 2022 valuations were already starting to show signs of a decline and the latest valuations have continued on the downward trend.
Mailbox REIT’s Birmingham office asset was valued at £157m at 31 December 2022, versus a £189.7m valuation three months earlier, showing a sharp decline in one quarter. Overall, in the whole UK real estate sector, React News have reported that £130bn of value was wiped off UK assets in 2022.
One of the reasons for the reduced market activity, is the current price difference between sellers and buyers expectations. Sellers are holding out for yesterday’s prices whilst buyers are looking at potential future price of an asset, once the price discovery in real estate has equilibrised.
Whilst the investment market has slowed down in H2 2022, deals are being done in all asset classes but in a small volume. With the UK set to enter a recession in 2023, history tells us that in a downturn, there are always buyers circling when sellers start panic selling.
There will be sellers whose hands are forced in the next 6 months, either from a redemption request from investors or loan to value breaches due to the year-end valuation dip. Declines in valuations could see loans being cured, thereby triggering emergency funding from forced sales or new equity.
Other investors are coming to their end of their financing arrangements in 2023 in a very different lending market to when they agreed the debt. Investors will scramble to find ways to bridge financing gaps as lending markets seize up from rapidly rising interest rates, the latest being a rise to 4% in early February 2023.
The question for investors will be judging when entry prices have hit (or about to hit) the bottom, and judging this parameter is as difficult as it has ever been.
It is expected that for the majority of asset classes, the pricing at the end of Q1 2023 will still be uncertain, and with a lack of deal flow in the first 5 weeks of the year, further reductions in valuations are likely at the end of March 2023. Thereafter, as we arrive at H2 2023, pricing is expected to stabilise and market activity pick up, especially with distressed assets coming on the market. Equity rich investors will be one of the first to emerge to take advantage of any opportunity without the burden of external financing and the issues around the cost of debt.
The logistics asset class had the biggest swing in pricing following a ‘hot market’ established in Q4 2021 / Q1 2022 with buyers paying over asking price as demand outweighed supply. This pricing is in the process of being corrected following heavy valuation shifts in H2 2022.
The gap between the sellers expectations and that of the buyer are converging in the logistics space and this asset class is likely to be one of the first movers given the downward valuation trend started earlier than other sectors.
In conclusion, there are shoots of recovery and small volumes of deals being completed, but once buyers and sellers close the gap on price expectations, and in some instances with the intervention of lenders, deal traction will increase and the ‘new’ pricing will stabilise.
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