Last week’s leader was a timely and friendly reminder to the industry not to ignore the elephant in the room as we head into a seemingly inevitable recession.
After a decade of low interest rates, the investment climate has changed dramatically. There is a consensus that the market is heading for a significant correction, with predictions ranging between 10% and 20%. This is likely to create a perfect storm of investors breaching their covenants, calls for fresh redemptions and more restricted access to capital.
While listed property has historically been more vulnerable to price adjustments, there can be no complacency among private property companies, many of which aren’t equipped to navigate this more challenging market.
Just because real estate is an inherently illiquid asset doesn’t mean plummeting values can be ignored. While this might offer the advantage of deferring some pain, it is vastly outweighed by the disadvantages of not responding to real-time price adjustments.
It’s a well-established principle that what can’t be measured can’t be managed, so investors can’t afford to ride out this paradigm shift in market conditions with their heads in the sand.
As the definition of a cyclical asset class, there is a tendency in real estate to ride out the storm in the hope of reaching sunny uplands. Assuming it ever was, this is no longer a valid investment rationale. Investors will have to employ much smarter capital management to raise capital, restructure debt, identify tenancy issues, measure risk via scenario/sensitivity modelling, and manage redemptions or disposals.
As the market tips into crisis mode, we are likely to see a divergent response: those who confront reality and actively manage their way out rationally and those who ignore the headwinds and panic.
Scott Willson, chief executive, Forbury Valuation Software