Are Your Preparing For the Impending Investment Property Storm?

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Investment Property

Growing difficulties across all market segments, coupled with instability in the capital markets are amplifying existing pressures brought about due to the general unease with the current geopolitical situations. In addition, these pressures are enhanced by upcoming financial regulations is set to be imposed in some sectors. All of which are forcing a strategy rethink among real estate investors. Said strategic evaluation is primarily an emphasis on capital preservation while some are further considering a retrench.

Finance Squeeze

As mentioned above, financial regulations are one of the major reasons for many real estate investors engaging in tweaks to their strategic objectives. While financing has already suffered from the implementation of High Volatility Commercial Real Estate regulations, the further impact of risk retention rules and accompanying regulations will further reduce the availability of financing. This will occur with or without any action or reaction from Central Banks concerning interest rates.  Tertiary markets are already suffering from the difficulty in obtaining financing; this could be considered a major obstacle that shows no signs of abating.

Related Post: Why It’s the Perfect Time To Invest In Single-Family Homes

 

Return Reduction

In addition to the financial squeeze, return expectations are indicating a decrease over the three-year period starting with 2016. Commercial heavy, real estate portfolios can reasonably be expected to experience low returns. This is despite asset stabilization that has provided some relief. With some expectations as low as 5.6 or 5.7 percent according to PREA’s consensus survey, should these pan out, it poses further challenges upon the investor. Giving the ongoing general instability in the markets and in the geopolitical situation, expectations seem to be on track.

Real Estate Investment
Current Investor Movements

At this point, while many real estate investors are reevaluating their long-term strategic objectives in light of the financial squeeze and potential reduction on returns, there has been no indication of wholesale flight in any specific direction. Many are focusing on value-added propositions and core funds, but there still remains a significant amount of investor fund diversity

Federal Rates And Brexit

The uncertainty with both the Federal Reserves moves on interest rates and the ongoing elements surrounding Brexit are still on the minds of investors. With the primary concern being negative interest rates, moves to increase rates would be a welcome move for many investors. However, should the Federal Reserve maintain current rate levels, this could further impact capital. When this is brought into perspective with the realization that any investor uncertainty concerning Brexit is starting to level off, the reaction of increasing scrutinization of risk makes all the more sense.

Jay Rollins, CEP of JCR Capital remarks, “The investor base is very nervous and waiting for a shoe to drop. Interest rates will be lower for longer. We have been in a sub-2.0 [percent] treasury environment for quite some time. Bonds are not paying as well and there is no earnings growth. We have seen pullback from investors, who remain cautious. What does that mean for commercial real estate? Investing will fall into two buckets: trophy properties in gateway cities and middle market properties. Trophy properties are sure to attract more international capital for safety reasons.”

Movement towards less development and more on both mid-range properties and trophy properties in gateway cities are the safer prospects at present for capital attraction. Of course, this reflects the increased emphasis on taking on manageable risk. With most investors proceeding with caution, only significant changes in the reduction of overall uncertainty will move the investor situation forward.

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