Real Estate Valuations Stabilising

Evidence that valuations in the commercial real estate sector are stabilising is building, after unprecedented declines in the second half of 2022 had seen investor sentiment to the sector wane.

Data from MSCI showed that capital values in the UK increased 0.21% over the month of March. This was the first rise in eight months as property yields moved out to keep pace with interest rate rises.

Its good news for the sector, having seen values fall faster in this current period of uncertainty than during the 2008 global financial crisis. Negative returns in October last year were the worst on record at 6.5% versus a previous low of 4.75% in the wake of Lehman Brothers’ collapse.

Recent real estate investment trust (REIT) updates have mirrored the MSCI data. AEW UK REIT (AEWU) reported a 0.8% uplift in the value of its portfolio over the first quarter of 2023. CT Property Trust also announced a 0.8% increase in its portfolio valuation for the quarter.

According to the MSCI’s IPD UK Monthly Property Index showed that the industrial and logistics, retail and residential sectors were the strongest performers, with 0.7%, 0.8% and 1.5% value growth over the month, respectively.

The office sector was the only mainstream property sector continuing to post value declines, however, at 1%.

After the extraordinary valuation falls last year, investors have returned to the market with renewed confidence in pricing levels, supported by the stability in UK government bonds.

As the data shows, cautious investors are favouring sub-sectors that have strong occupier fundamentals and rental growth prospects (like logistics). Offices, especially those that are of lower quality and below-par ESG-credentials, remain under pressure due to ongoing uncertainty over demand.

Although the first signs of price stability in the real estate market is good news, the outlook for valuations over the rest of the year remains unclear.

Valuations will be a recurring topic for REIT fund managers at QuotedData’s Property Investment Conference on 18 May 2023. To view the agenda, speaker line up, and to book your live streaming ticket please visit www.quoteddata.com/events and use the code MIPICV23