Van Lanschot Kempen: real estate remains under valuation pressure

Independent wealth manager, Van Lanschot Kempen, believes private real estate will continue to see downward pressure on valuations over the next 6-12 months.

The Dutch firm has made its views known in its Q3 Alternatives Quarterly report, in which it says it maintains a ‘cautious view’ on the asset class.

Providing the back story, on a relative basis global private real estate underperformed global listed real estate in Q2, and both categories significantly underperformed broader equity markets, which managed +6.8, while real estate was flat.

In Europe, the best performing sector has been retail (+0.4%), whilst the worst performing sector was offices (-2.4%). In the US, best performing sector was Industrial (0.0%), whilst the worst performing sector was offices (-6.1%).

US Private Real Estate returned -1.6% over the second quarter of 2023, while European Private Real Estate returned -0.8%. APAC Private Real Estate returned -3.4%, even worse.

The report says transaction activity remains slow and has slowed down further in response to rising borrowing costs.

‘We expect that transaction activity in secondary markets will pick up once sellers are more willing to transact at (lower) valuations to persuade buyers.’

‘In the logistics sector we are seeing some tentative signs. Development activity has also dropped as higher financing costs weigh on profitability.’

‘The outlook for the residential sector remains relatively positive, largely due to supply-demand imbalances.’

‘A push towards simpler supply chains and “nearshoring” will act as a tailwind for industrial and logistics sectors. Growth in ecommerce will also benefit the industrial sector, however this factor poses risks for the retail sector.’

‘The office sector remains most vulnerable due to “working from home” and high capex required to improve sustainability of buildings.’

The company notes that although yields on public and private real estate are similar, the volatility in listed real estate has been noteworthy: prices have fallen by 20% from their peak in December 2021 compared to a 5% price fall in private real estate.

Fundamentals remain healthy, with occupancy rates in Europe at historically high levels and market value rents growing steadily, it notes.

‘Within Real Assets, we like the inflation-hedging characteristics of Private Infrastructure and Farmland but expect that Private Real Estate may continue to suffer from downward valuation revisions. Similarly, the current macro-economic environment, combined with elevated valuations, makes us cautious on Private Equity, particularly large buyout funds.’


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