Solid foundations to build on in the year ahead

Prevailing uncertainty in global markets coupled with rising interest rates and an inflationary environment have all come together to put significant downward pressure on asset valuations, which in turn has hampered the appetite to allocate among international investors, ultimately decelerating transaction flow.

That’s not to say that the sector has not seen deals happen over the past 12 months; but those that have happened have tended to be smaller and highly targeted, with leverage being low and capital-raising conditions proving persistently challenging.

According to Preqin, the third quarter of 2023 saw a downturn in real estate fundraising, with just $18.2bn (£14.3bn) raised from 61 funds – a 71% decrease in capital raised compared with Q2 and the slowest rate of fund closures in the present cycle of interest rate increases.

This year has not given the real estate sector a huge amount to shout about, but it has provided a rare opportunity for savvy managers to put the groundwork in and plan effectively for the future

Those specific areas that have seen some action have tended to be the ‘core’ and ‘core-plus’ assets, where there is a strong and secure income generation element, or where sustainability credentials are high. There has been some movement in the REITs market too, where access is perhaps easier and leverage is not so much of an issue.

Generally though, with no leverage and difficulties in refinancing, deals of real significance have been hard to push through.

The repercussions of this have been interesting. With the immediate pressure of high-volume deal flow off the table, a period of self-reflection has been created in the market. While that is not necessarily positive from a short-term market perspective, it is arguably not such a bad thing in terms of long-term platform building.

Agility

From JTC’s perspective, our ability to be agile to support asset managers and investors in a different kind of non-transaction-heavy environment has been pivotal.

Our teams have been providing diverse support and solutions – spanning structuring, data management, governance and regulation, tax and accountancy and wider administration – helping clients navigate short-term challenges, but also helping them use this time wisely to build a foundation and gear up for when there is momentum in the market.

Meanwhile, there has also been a significant focus on liquidity and asset valuation, with managers in some cases needing to generate liquidity by selling assets, while facing the prospect of assets, such as those with low sustainability credentials, being heavily discounted.

Pleasingly, however, investors, managers and advisers have also shown a genuine desire to put the groundwork in now, collaborate on initiatives and come together with a longer-term view; so that when the time comes for them to press the ‘go button’, they are in a strong position to do so and move quickly. Our teams have very much been part of those collaborative, forward-thinking efforts over 2023.

Looking forward

As we look into 2024, the key will undoubtedly be timing. There will be a point when asset values are perceived to have bottomed out – and there is then potential in the market for opportunities. A key moment then will, of course, be when interest rates begin to consistently move downwards, which will help to ease pressure on valuations, reduce the cost of leverage and start to unlock deal flow.

When that happens, there will be competition for investment, which is why it has been so important for managers to use their time now wisely while they can.

One area where we anticipate seeing sustained interest is in the environmental, social and governance (ESG) and sustainability space. ESG thinking is already being integrated into investment deals; but with 2023 having given investors, managers and developers the opportunity to reflect on their plans, there has been a definite move in preference towards stripping properties down to integrate ESG strategies, rather than building from scratch.

That will be an interesting trend to watch next year, and an area where we at JTC feel particularly well-placed to add value, having focused considerably on developing our integrated sustainability services proposition over the past year.

Regulatory evolution

From a regulatory point of view, meanwhile, the UK’s Register of Overseas Entities (ROE) remains a key consideration for any overseas managers or investors. Having been introduced in the summer of 2022, firms are now into their second year of reporting and should have a good grasp of how it works.

There was, inevitably, some initial frustration around the additional administrative burden it presented when it was first introduced, as well as a lack of guidance; but there is now a better sense from industry about how it works in practice.

The recent implementation of the Economic Crime and Corporate Transparency Act 2023 is also high on the agenda, as it seeks to introduce a similar regime to the ROE for UK registered companies, limited partnerships and LLPs, through either direct verification of information at Companies House or indirect verification from an authorised corporate service provider (ACSP).

The Act also introduced some changes to the ROE impacting trusts and trustees, which is likely to increase the registration requirements for more complex ownership chains.

As an approved verification agent for the ROE and an ACSP in the UK, JTC has worked hard over 2023 to help firms navigate the reporting procedures safely and securely. Our focus in more recent months has been on enabling firms to get ahead of their annual reporting requirements for the ROE and supporting firms with their verification needs as ACSP going into 2024.

Solid foundation

This year has not given the real estate sector a huge amount to shout about, but it has provided a rare opportunity for savvy managers to put the groundwork in and plan effectively for the future.

As we gaze into 2024, the landscape is different from where we were 12 months ago, and there should hopefully be better days and bigger opportunities on the horizon.

Remaining agile will be critical, but JTC’s team of multi-jurisdictional experts remains focused on providing diverse support to the sector, as it continues to evolve.