Real Estate Investing In A Tough Spot But Signs Of Green Shoots On The Horizon
Last month, I touched on the anticipated slowdown in the US private debt market but it’s the same for private equity, and venture capital, and the same also for real estate; all private markets sectors seem set, at least right now, for a retraction in fundraising and deal flow levels in 2023.
There’s been a lot of coverage in the media in the past few months about REITS and investor redemption requests; rising interest rates and falling stock prices in the second half of 2022 saw investors seeking to pull the plug to lock in gains made in previous years. Some REITS have gated their products as a result of the scale of redemption requests.
It’s not much more of a rosy picture in the private space. The executive summary in Preqin’s Global Report: Real Estate 2023, published in December last year, says, “There are strong headwinds to global real estate, with rising rates dominating the immediate trajectory of the asset class. Valuations are under threat and our investor clients see real estate as one of the most overvalued asset classes.”
Market commentators expect the Fed to continue to raise interest rates this year, despite the rate of inflation decreasing for each of the last six months. But the unemployment rate in the US in January was just 3.4%, the best number in decades.
That extra money in American’s pockets could well find its way to both the residential and the commercial real estate market. Yes, rents are falling, and the average house price fell in the last quarter for the first time since 2020. But the data is published with a lag, and risk assets have enjoyed a terrific start to the year, with the S&P 500 advancing in January and even Bitcoin enjoying a remarkable rally in January (although it has since fallen off).
Something I’ve always felt about the real estate market is that high net worth individual investors and family offices have long been active in the space in part because they understand it really well; it’s arguably one of the most accessible alternative investment asset classes, accessible not in the sense of liquid vehicles like REITS, but in the sense that the drivers of return are more straightforward to understand. Where much of the data that exists about the private real estate industry is skewed by the medium and large size managers and investors, the smaller end of the market seems to be very active. Indeed, those real estate managers that have nimble portfolios – usually, the smaller managers – can flip a switch and become sellers of overvalued assets classes such as Multifamily and rotate into distressed assets and other sub-classes of real estate such as Single Family Build-to-rent communities, and off-market deals.
There’s still a lot of uncertainty generally in both public and private markets, but for those that have put new real estate fund launches on the back burner, perhaps it might be worth heeding the words of the great Warren Buffet and “be greedy when others are fearful”.
**The above reflects the personal opinions of the author, and is not to be considered investment or legal advice or advice of any kind.
