Real estate continues to show potential – but is tainted by uncertainty

Initial yields are up – by varying degrees While the higher lending interest rates have so far not slowed down activity in the investment market, the effect on prices is clearly visible. The sharp increase in borrowing costs has an impact on the business cases of individual investments, and for the first time in a decade CBRE is noting an increase in net initial yields across nearly the entire real estate sector, and, concomitantly, falling property values. The extent of this increase depends on a variety of factors, including the type of real estate involved and how low the initial yield was a few months ago in comparison with bond yields. We see the largest price discount at prime offices. Partly because of the originally low initial yield level, CBRE sees that the increase in the initial yield leads to the largest negative price effect in this segment.

Change in net initial yields of prime products by sector (between April and July 2022)

Source: CBRE Research

There are several factors that determine changes in net initial yields. Can rental growth be facilitated by optimising exploitation, and can inflation be charged on to tenants?

The most striking trend is that of supermarkets. The number of buyers focusing on this sector continues to increase, including both private and institutional investors from the Netherlands and elsewhere, and everything in between. The upshot is that initial yields for supermarket real estate remain under strain, with one of the reasons being that investors tend to enter the market with minimal financing – or, in some cases, with none whatsoever.

Interest rate trends will determine investment climate this autumn If interest rates stabilise after the summer, CBRE will expect a relatively large amount of investment activity during the remainder of the year. Demand remains high due to high inflation and liquidity, and the large number of real estate properties that have been fully optimised has increased pressure to sell. It is appealing to put these properties on the market as soon as possible, unless the current owner intends to exploit the investment product for a longer period of time (optimisations tend to deteriorate over time, for example due to expiring leases).

CBRE does not expect interest rates to return to 2021 levels for the foreseeable future, and (for this and other reasons) the same applies to prices, which remain lower than at the start of 2022. For many investors, this still means they can go ahead and sell their assets, because although prices have fallen, they can still rely on historically low initial yields. Conditions therefore remain favourable.

However, due to the new price stability we will still need to adjust our investment volume outlook. Whereas in January of this year CBR estimated investment volume to reach €20 billion in 2022, we have since adjusted this to €18 billion, which still means an increase of 3.8% over last year. The lower prices are offset in part by increased activity: we are seeing a growing number of products in the market. CBRE is also expecting to see the impact this year of the increase in property transfer tax. The Dutch government intends to raise this tax to 10.1% on 1 January 2023; this will cause many investors to sell their products in 2022 so as to avoid the higher rate.

Projected investment volume for 2022

Source: CBRE Research

We expect to see the largest decline in investment volume in the residential investment market, where uncertainty regarding future regulations is causing investors to hold back. This will remain unchanged until the government has disclosed the nature of the regulations it intends to introduce, which will not be before sometime this autumn. We will then also see the impact on the exploitation and pricing of investment products in the residential market. The question remains what options will be available for new developments at that point – after the introduction of new regulation, stricter building requirements, and steadily increasing construction costs.

One thing is certain: we are entering a new era in the investment market. Whereas initial yields fell almost automatically for many years, CBRE is seeing a turning point, starting with higher interest rates. The initial impact of this development is already visible in the market.