Catella Infographic - New capital market environment - When announcements make life easier for investors.

Admittedly, the wording is somewhat provocative, especially as this is a situation that is changing the structure of the entire property sector. There is talk of "two more interest rate hikes" by the ECB before June. The first will take place this week, the second at the end of the second quarter. Although these are just statements, every investment is preceded by speculation - and we speculate that this will be the case. And already there is a supposed planning certainty. Or is it?

Especially as we will gradually experience real changes in the value of commercial property in the coming weeks. In property parlance, this is known as the time lag effect. It is the same timelag effect that we already documented in Q4 2022 and Q1 2023 for residential property valuations. Purchase price declines in Q3 2022 were documented by appraisal committees, mortgage bond banks and appraisal associations. This is not necessarily a substantial threat per se, especially as rents have continued to rise, but it is paralysing new activity from construction to investment. At the moment, no-one wants to be caught in the much-cited "falling knife". Wait and see seems to be the watchword as long as no "new pricing" has begun. And this price formation will be determined by the interest rate situation and initial transactions in Q1. It should be noted that the continuing high inflation rates in Germany are leading to rising index rents, which is putting upward pressure on the corresponding property prices. However, there are indications that the current market developments will lead to moderate price declines in the coming months, despite the index rents. There is also slight optimism in the sector. Some economic indicators are showing positive trends, making it realistic to assume that the market will return to calmer waters from the second half of the year and that this will also be reflected in price and transaction trends.

If interest rates continue to rise as a result, the spreads between the yields of various property classes and the yield on the 10-year German government bond, which have been measurable in recent years, will be at risk:

• Logistics property - government bond: 416 BPS (annual average value time series: 2004-2022)
• Retail property - government bond: 199 BPS (annual average value time series: 2000-2022)
• Office property - government bond: 196219 PBS (annual average value time series: 2000-2022)

This was always a clear signal in favour of real estate in the asset allocation. At this point, most people realise that this structural advantage - if it is not to disappear - can only be achieved through an increase in yields, i.e. a fall in average purchase prices. This does not necessarily have to be the case for new buildings and CBD locations, but an average property will notice it. This is why the question is currently not "what are we going to do at MIPIM in March?" The answer is: "look for the bottom".

We hope you enjoy analysing our infographic.

Yours
Prof. Dr Thomas Beyerle
 
Prof. Dr Thomas Beyerle
Catella Real Estate AG
Alter Hof 5
80331 Munich
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