7/24/2024

Are we there yet?

Viewpoint

This is the implied question in so many conversations with investors at the moment, when trying to assess whether the bottom of international real estate values has been reached. To me, it feels like it is, but the problem is we’ll only know it was the low point when it’s gone.

The data, by definition, is always backwards looking. NCREIF, reporting on US real estate capital values show a further 2.1% decline in values in Q1 2024, but strip out the office sector and the position is far more stable. For the UK, the tipping point looks even closer, with MSCI reporting a fall in capital values of just 0.6% in Q1 2024.

But we’re playing at the edges here. The bigger picture is that real estate values have fallen around 20% both in the US and the UK since the music stopped in the summer of 2022, and that creates opportunities for international Islamic equity looking to invest.

While IFN hasn’t been jammed with stories of new acquisitions, in the wider market activity is picking up, with UBS reporting that after seasonal adjustments the US real estate transaction volume was up 24% and EMEA volume up 16% in Q1 2024, compared to the previous quarter.

Sticking with UBS, they maintain that the public markets lead the private real estate markets by two to three quarters, and that with listed markets having bottomed out at the end of 2023 and shown some recovery in Q1 2024, a recovery of the private markets should follow later this year.

Interest rates of course have an impact, not just the level, but the direction. We already have the first cut in Europe, the UK seems poised for an August reduction, but the US still seems at least a few months off.

Political uncertainty doesn’t seem to be a primary concern of investors I speak to, but with the UK election now settled, and with those interest rates cuts tantalisingly close I believe it’ll be the UK that shows an upward turn ahead of the US.

The summer provides a helpful excuse to adopt a wait and see stance, so let’s see what the mood is in September. Even if this shows that at least some real estate markets have started an upward trajectory, I’m not predicting a rapid rise in values, with finance costs still acting as a dampener.

Written by Philip Churchill, first published in Islamic Finance news Volume 21, Issue 29 dated 17th July 2024.