Originally published November 2022.

…but REITs look well positioned.

The cost of debt for real estate increased steeply in 2022, as credit conditions tightened, loan margins widened and recession fears started to bite. Rising rates have already caused greater financial market volatility, raising the risk of a market accident, as highlighted by the UK pension fund cash calls in September. 

Policymakers’ desire to continue tightening until excess inflation is fully removed from the economy is starting to clash with the need to maintain financial stability, raising the risk of financial market distress. Any forced selling at scale would lead to a more significant downturn in global commercial real estate markets. 

In this context, we believe that REITs look better positioned than the private real estate market due to a combination of lower leverage, limited near-term debt maturities and steep discounts to net asset value (NAV). Loan-to-value (LTV) ratios are lower now than during the global financial crisis (GFC) for most regions; the exception is Asia-Pacific, but LTVs are still low on a global basis (chart 1).

Chart 1: REIT LTVs are generally low