UBS argues that the new delay in policy tightening by the major central banks continues the trend of recent years which has seen expected rises in bond yields fail to materialize.
“Provided the economy keeps growing there seems no reason to believe why the new delay should not be positive for real estate. In line with the economy, we think real estate markets are later in the cycle, but more resilient than they were prior to the financial crisis. For example, on the occupier side we estimate that tracked global office stock rose by around 1.5% in 2018, compared to growth of 2.5% in 2008.
“This makes a supply induced downturn in rents less likely and also provides a cushion should occupier demand weaken. Lower development activity has been driven by more cautious developers, who now tend to require pre-lets, and reduced availability of financing for development projects from banks. Any financing secured is also typically on stricter terms.”
Investors and lenders have been cautious on lending as the cycle has continued to mature, and remains well below levels reached prior to the financial crisis. For example, the Cass Lending Survey reported that 74% of the loan-book on UK commercial property in 2018 had a loan to value (LTV) ratio below 60%, UBS cites.
Restrained leverage is also reflected in data on property funds. In the financial crisis falling values saw many borrowers breach their loan covenants, which forced them to sell assets and caused further stress in the market.
“In those pockets of the market which are currently weaker, such as secondary shopping centers, borrowers are being encouraged to inject equity. This should steer the market towards resilience in the face of any value falls and make forced sales less likely. One area which may prove trickier though is the refinancing of loans made by closed-ended debt funds. Indeed, where values have fallen such borrowers may need to inject equity in order to secure new financing.
“Overall, though we think both occupier and investor markets are well placed should any shock filter through from the economy. The current environment of ongoing low interest rates accompanied by reasonable levels of economic growth is supportive of real estate. The main danger would come from any pullback in the economy, particularly if it was prompted a sharp rise in interest rates to control inflation, which would erode real estate’s relative pricing appeal. For the moment though inflation seems contained.”