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Global investors have slashed their allocations to real estate to a 15-year low as the sector struggles under the pressure of high interest rates.
A net 28 per cent of managers were underweight the real estate sector in May, down 13 percentage points on the previous month, according to Bank of America’s latest global fund manager survey.
The commercial property market has undergone a painful shift away from ultra-low interest rates, compounded by uncertainty over the future of offices following the Covid-19 pandemic. Recent concerns that borrowing costs in big economies are set to remain higher for longer have weighed further on the sector.
“A change in interest rate expectations is a contributing factor to this change in sentiment, as fundamentally nothing has changed since March other than the inflation story in the US,” said Oliver Salmon, a director in Savills’ world research team. “Interest rate declines are needed for market sentiment to improve.”
The BofA survey of 245 money managers with $642bn in assets under management suggests allocators are moving away from real estate and into consumer stocks, bonds and cash.
The global commercial real estate sector lost investors 4.1 per cent in 2023, the lowest annual return since 2009, according to MSCI’s Global Annual Property index.
Some European real estate markets performed even worse last year than during the 2008-09 financial crisis. The office sector has been hit particularly hard, suffering high vacancy rates and uncertain demand as occupiers adjust to new working patterns.
Fewer rate cuts in 2024 would impact refinancing in the sector as costs increase and asset values decline. About $820bn of US commercial property loans are likely to mature this year, according to MSCI, including about $214bn in loans that were extended after maturing last year.
“In the US, there is concern over a significant refinancing gap,” said Salmon. “The longer that rates stay higher, the more difficult it is to ‘extend and pretend’.”
Many owners are reluctant to sell their properties and crystallise sharp losses, in the hope that the market rebounds in the near future.
Dealmaking has also slowed down. The global real estate market has seen seven consecutive quarters of falling transaction volumes, with dealmaking dropping 18 per cent year on year in the first quarter of 2024, MSCI’s data shows.
The BofA survey showed sentiment among fund managers was at its most bullish since November 2021, with 64 per cent of investors saying they did not expect a recession in the next 12 months. Higher inflation is the number one “tail risk”, according to 41 per cent of investors.
