02/09/2023 | by Sarah Borchersen-Keto

The potential for rolling country-level recessions and the impact of higher interest rates on transactions and capital flows are among the main themes influencing global real estate investment in 2023. The result, according to Citi’s global real estate research team, are opportunities mixed in with the broader uncertainty facing investors.

“I think there's a lot more uncertainty entering 2023 than we've seen at least in the past few years, putting aside COVID. I think that's going to be the biggest challenge and opportunity depending on how that turns out,” Nick Joseph, Citi’s global head of real estate and head of the U.S. real estate and lodging research team, told Nareit’s REIT Report podcast.

Global sector-specific trends that Citi is monitoring include: the future of the office; e-commerce and the impact on brick and mortar; lodging demand and recovery; health care coming out of the pandemic; housing trends; and digital transformation and its impact on infrastructure.

Citi is expecting a milder recession for the U.S. in the back half of 2023, and U.S. REITs to post a total return of 5% to 10% for the year. Joseph noted that since 2000, there has been nearly 50 percentage points difference between the top quartile of REIT performance versus the bottom quartile, “so we always think that there's a lot of opportunities to create alpha in this space based off of both property sector allocation and, more importantly, stock selection.”

Aaron Guy, Citi research analyst based in London, said expectations for real estate investment in the U.K. and Europe are generally flat to down for most sectors over the next year or so and that the attractiveness of real estate to comparable competing investments like bonds has narrowed.

“That's causing investors to step away a little bit and investment volumes are down and there's a bit of a repricing,” he said. While there are a lot of nuances with sub-sectors and geographies, broadly speaking asset value declines in some sub-sectors were up to around 30% by the end of December based on just the rate change environment, Guy said. “Volatility in the markets is how I'd characterize what's happening in Europe at the moment.”

Howard Penny, research analyst based in Sydney, noted that many of the Asia-Pacific countries don't expect the same risks of recession as elsewhere in the world. This includes Indonesia, Japan, Australia, Thailand, Malaysia, Hong Kong, and Singapore. Penny added that Citi’s China and Hong Kong real estate teams also expect a turnaround in 2023 after deleveraging and the reopening after the pandemic.

“That's positioning China as a potential positive counterweight within real estate,” Penny said.

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