2013: LaSalle predicts low interest rates, low inflation and low growth scenario
Real estate investors will continue to encounter low interest rates, muted inflation and sluggish growth in most of the world’s major real estate markets for at least the next couple of years according to the 2013 LaSalle Investment Management outlook for the global real estate markets.
A multi-speed economy has seen low interest rates, low inflation and low growth in the developed world as opposed to higher inflation, high growth/urbanisation and rising interest rates in the developing world.
In this scenario, LaSalle believes there are more reasons to be optimistic in 2013 with steady improvement in the world’s three largest economies: US, China, and Germany.
“Highly accommodative monetary policies are bringing relief to capital-intensive industries like real estate. At the same time, the low cost of debt, along with changes in the regulatory treatment of different kinds of debt, introduce new uncertainties into the real estate investment equation,” LaSalle said.
Uncertainties will include distortions between unsecured and secured lending, uneven access to low-cost real estate credit between countries and within countries, exit uncertainty when unprecedented levels of support for credit markets are eventually withdrawn by central banks and timing/sequencing uncertainty, when monetary tightening occurs before a full recovery in the “real economy” has completely taken hold or is delayed.
“These uncertainties should result in the vast majority of capital markets remaining extremely risk-averse. This situation is exacerbated by the deep pools of capital that are entering the drawdown phase of their lifecycle,” said Jacques Gordon, global Strategist at LaSalle said.
During this phase, investors will typically migrate from a long-term growth strategy to a more conservative income-generating one. Even if some investors are in the drawdown phase, where income distributions matter more, extreme risk aversion is no longer warranted. In fact, this approach could create its own set of portfolio risks.
In Europe, LaSalle thinks that debt restructuring still needs a lot of hard work. This deleveraging process, while painful in the short run, is absolutely critical for healthy economic growth in the years ahead. The region continues to be beset by the largely unresolved sovereign debt crisis and the real estate occupier markets remain vulnerable but with certain markets weathering the uncertainty better than others.
Equity investors are as reluctant as ever to venture far from core assets, while debt investors remain constrained.
LaSalle cited mezzanine debt, prime assets, near-CBD submarkets and retail as the best opportunities in Europe.