Real estate investment in 2023: predictions, commentary and methodology
We predict that cross-border flows in 2023 will moderate, returning to the levels seen in the mid-2010s.
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However, should the residential sector continue along the same trajectory as in recent years, that could bring potential upside to the overall numbers.
The US, UK, Germany, Australia and France are expected to be the top destinations for global cross-border capital.
We forecast that the list of the largest sources of cross-border capital will be headed by the US, Canada, Singapore, Germany and the UK, with their principal targets predicted to be the office, industrial, residential and retail sectors.
How did our predictions hold up in 2022?
Last year, our Capital Gravity model forecast the US as the top destination for global cross-border real estate capital in 2022, followed by the UK, Germany, France, and the Netherlands.
Amid a difficult year, with a significant geo-political shock that has led to economic and financial shockwaves, we predicted four out of the five top correctly, with Australia replacing the Netherlands. At the time of writing, the UK, the US, Germany, Australia and France are indeed the top spots for cross-border capital.
"Three European locations remain in the top five destinations"
The fact that three European locations remain in the top five destinations speaks to the resilience and safe haven qualities of these locations.
Last year we predicted that years of pent-up demand from investors unable to properly transact during the pandemic, combined with a ‘roaring twenties’ sentiment as markets re-opened, would lead to record activity in 2022, followed by a moderation. The shock of the Russia-Ukraine crisis and the impact of sanctions and energy security has curtailed some cross-border activity, though not equally across all sectors.
As Active Capital goes to press, cross-border global logistics and residential volumes have both reached the second highest Q1-Q3 levels, according to RCA. Pent-up demand can also be seen in domestic activity, which after being muted initially during the pandemic, has seen record Q1 - Q3 global volumes.
What other factors could influence capital flows in 2023?
1: Volatility and uncertainty
We are in a period of exceptional volatility, predicated by geopolitics and exacerbated by uncertainty over fiscal and monetary responses. Volatility not only makes it difficult to price deals, but variations in equity and bond prices can lead to significant ‘accidental’ allocations of real estate for investors.
Those investors able to look beyond near-term volatility and swings in sentiment to sector and local area fundamentals are likely to find opportunities.
2: Currency
In 2023 we expect to see ongoing fluctuations in currency as energy prices, interest expectations, and inflation continues to vary.
Currency outlooks remain wide-ranging, although the consensus is that weaker currencies against the US dollar, such as the euro, sterling and Australian dollar, could see some appreciation, especially in the second half of 2023.
"Lenders are increasingly likely to look at ESG buildings favourably as they shift their balance sheets towards greener exposures"
The start of this year particularly could see relatively competitively priced real estate assets in these locations for US dollar-denominated investors, and we could see more use of currency collars.
3: Monetary policy
Many forecasters expect inflation to peak around the start of 2023, but there’s less of a consensus around central banks’ monetary policy responses.
Central banks must trade off inflation targeting, and 2023 GDP growth worldwide has been downgraded over the last year, while low levels of unemployment provide a case against lowering rates should global GDP growth wane. Plans for Quantitative Tightening (QT) should also be watched closely.
Many central banks were planning to unwind over a decade of Quantitative Easing through QT, which could put upward pressure on government bond yields, although the exact effects are unknown.
Sustained upwards pressure on government bond yields could, in turn, lead to upward shifts in the risk-free rate element of real estate yields, putting pressure on the yield gap and ultimately reducing prices. Monetary policy will also impact lending, which our Active Capital 2023 report further explores.
4: ESG
While some investors may focus on a back-to-basics real estate policy, we expect real estate interest in ESG to continue to grow, albeit alongside a heightened understanding of the risks of greenwashing.
The right ESG-focused real estate may offer more efficient energy use, lower energy costs, and mitigate climate risk, all while being more attractive to occupiers and therefore benefitting from more resilient rental income.
Lenders are increasingly likely to look at ESG buildings favourably as they shift their balance sheets towards greener exposures.