With valuations and pricing approaching an expected low point, real estate equities and private markets may provide good opportunities for investors.

Rent growth, repricing, and peak rates are laying the ground for recovery in core real estate returns going into Q1 2024.

This assessment was made by Jessica Hardman, head of European real Estate portfolio for DWS, who says there have been significant moves in values for real estate in the United States and Europe which may have an effect on Asia as well.

“What’s really interesting here in Europe, for instance, is that we’re seeing valuations which have recorrected by about minus 15% are getting quite near the bottom in our predictions, we think maybe about another 5% to go and that’s likely to come early part of next year,” Hardman says.

Narrowing gap

In the US, the Morningstar US Real Estate Index has fallen by 8.39% through to the end of October and the consensus is that it’s ready for a recovery. At the same time, the gap between the public market and the private market has been narrowing based on valuation metrics indicating a stabilization of the market.

Another indication that the real estate market is stabilizing is that the demand from property occupiers is robust, especially in the residential and logistics sectors, where there still is an overhang of high demand and low supply.

“We're looking at property indices and yield signs quite often, we've seen more recently that yields have been expanding by about 5bp over the last quarter, as compared to around 15bp in Q4 last year,” Hardman says. “So again, yield adjusting is really slowing now, as we're reaching the bottom of the market. However, investment activity has remained subdued with volumes about a third less that this time last year.”

As such, Hardman thinks now is a good time to enter the market, especially for investors who are looking for counter-cyclical sectors.

“As we are reaching the bottom of that market, it looks like a good vintage to be coming into real estate equity in 2024, especially for those investors that are particularly IRR (internal rate of return) focused. There will be opportunities in the value-add strategy, so this is accessing medium risk to get outside returns going forward,” he says.

Attractive opportunities

In terms of real estate equity investments, Europe is expected to be the top performing market, followed by the US and selected Asian markets.

In terms of real estate debt investments, the turmoil in the banking sector that began earlier this year has had a negative impact on financing in the real estate market, and this has led to the funding gap in both the public and private markets.

That banks are hesitant to finance real estate loans presents attractive opportunities for investors, particularly alternative lenders or lenders other than banks, considering that the wide funding gap has resulted in reduced credit availability and higher lending margins.

In Europe, for example, junior debt or bonds, or those with a lower priority for repayment, higher risk but higher yields than senior debt, are now trending as high as 700bp.

“This leaves a real opportunity for alternative lenders. So these lenders are experiencing all-in financing rates that have reached their highest level in the last 10 years. Of course, with the fall in availability of financing from the traditional lending market, there is less competition and attractive margins, especially for junior debt and home loans,” Hardman says.