So…It has finally happened. A mere decade later than initially expected, the real estate industry is coming to terms with the inevitable end of quantitative easing, ie, ‘normal’ rather than artificially suppressed interest rates. While we all enjoy a central bank-fuelled asset bubble, unfortunately the party must end at some stage and the real question is, how will the (listed) industry survive and in what form?
For some it will be a journey into the unknown (the cost of debt being greater than the initial unlevered yield), while for others it will be a return to the financing challenges of the 80s and early 90s, not forgetting to mix in a brief sample of the inflationary and industrial relations era of the musically superior 70s. More specifically, what factors are likely to affect valuations for listed real estate companies in the new normal era?
For the listed sector of course, there is an added layer: namely, what is currently priced in and are those implicit assumptions aligned with explicit forecasts or merely reflecting short-term sentiment? Additionally, it is important to understand whether the sector will be treated as a whole or there is substantial divergence, either by asset allocation, leverage or indeed management.
We have been fortunate enough to canvass opinion recently, by holding our series of online webinars which form part of the Understanding the REIT course at Bayes. We have had buy and sell side analysts, as well as specialist and generalist fund managers present to the course participants. There appear to be four key areas which all our expert guests broadly agree on from the series: